Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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.............tax. 66 Figure 35: Saint John NB ............................................. 53 Figure 28: Vancouver .........................................Regional & Urban Groupings...........Price History ........ 50 Figure 27: Victoria ..................... 28 Figure 8: Outlet Representation by Service .............................................................................................................. 48 Figure 25: Outlet / Volume Relationship .................................................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category..........8¢ Pump Price) ................. 56 Figure 30: Regina ..........................Selected Goods & Services .................... 40 Figure 18: 1995 Average "Blended" Pump Price ............... 71 MJ ERVIN & ASSOCIATES i .........Price History........... 35 Figure 16: Monthly Demand vs......Price History ...................................... 58 Figure 32: Toronto ................................. 24 Figure 6: 1995 Retail Outlets by Province . Income.............................................................. 49 Figure 26: Outlet Revenues................................................................................. 4 Figure 2: 1996 Average Prices/Margins ................................................................................................................................................................................................ 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ........List of Figures Figure 1: Pump Price / Margin Model...............1988-1995 ................................................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) .......... 42 Figure 19: Pump Price ............................................................................................... 36 Figure 17: Study Market Methodology ......................................................................................... 33 Figure 13: Monthly Gross Marketing Margins.............................................................. 44 Figure 21: Gross Marketing Margin Elements ..... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)....................Price History....Price History ............................................................................................Selected Centres .......................................................... 47 Figure 24: Outlet Volume vs............ Pump Price (nominal ¢/litre)......................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56........................... 45 Figure 22: Petroleum Gross Product Margins ....................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) .............................................................................. 43 Figure 20: Ex-Tax Pump Price Elements ........................Regular Unleaded ............... 30 Figure 10: CPI Index Comparison ..........................................Price History............. 46 Figure 23: Average Annual Throughput per Outlet..................................................................Price History ............. ex-tax elements ................................................................................................................. 25 Figure 7: Outlet Representation by Mode...................................Price History. 69 Figure 36: Halifax ......................Price History .... Gross Product Margin .............................................................. 54 Figure 29: Calgary ................................................................................................................................................................................................................................................. 63 Figure 34: Montreal . 62 Figure 33: Ottawa .......................................................................................................... 57 Figure 31: Winnipeg ................................................................... 70 Figure 37: Charlottetown ................................................................... 24 Figure 5: Canadian Retail Outlet Population ...Price History........Price History ......................................... 34 Figure 15: Monthly Rack Prices: Selected Markets ................................ Costs..........................

.............................................................................. 51 MJ ERVIN & ASSOCIATES ii .. 15 Table 3: Selected Study Markets .................. 13 Table 2: Taxes on Regular Gasoline on December 31..... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue............................................................................................List of Tables Table 1: Downstream Sales Channels ................................... 1996 .....................................

5 cents per litre on the sale of regular gasoline in a typical major urban market.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. and ex-tax pump prices.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.3 ¢ 28.8 ¢ TAX 28. Natural Resources Canada (NRCan). rack. the Canadian retail marketing sector realized an average gross product margin of 3.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. supplier costs and profitability. This study. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.1 ¢ 5. represented by crude. and the Canadian Petroleum Products Institute (CPPI). The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. dealer income.5 ¢ 0. Price competition occurs at three distinct levels in this industry. 1996 Average Prices and Margins . together with a separate review of the refining sector. These prices are determined in a competitive marketplace. and a foundation for effective policy development.4 ¢ 19.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.2 ¢ 24. each with unique MJ ERVIN & ASSOCIATES iii .

Approximately 16.500 retail outlets were in operation in Canada in 1995. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. nine of the past ten years. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet.dynamics. While each of these marketing channels operates in a competitive environment. Convenience store. The resultant margins are therefore a reflection of the state of product supply. are examples of ways in which outlet petroleum sales are augmented by other revenues. and the traditional automotive service bay. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . From 1986 to 1995. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). due to its prominence in the public and media domain. compared to about 22. this study focuses on the retail gasoline sector. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. and declined by 10 cents per litre measured in constant dollars. which potentially allow for reduced margins at the gasoline pump. demand and other competitive factors existing at the time. car wash.000 in 1989. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. Dealers have a variety of relationships with their supplier. and accordingly. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. well over half of all outlets in Canada operate as lessees or independents.

As a result of these trends. MJ ERVIN & ASSOCIATES v .crude) 5¢ Marketing Margin (retail . both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . and has been a result of several factors including: • • • improved refinery utilization and efficiency. This has both resulted in.The “tax-included” nominal pump price increased over this same period. however. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. From 1991 to 1996. as a consequence of refinery plant rationalization (closures) and a modest demand increase. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.

19 markets representing a broad range of conditions. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market.Comparison of Canada. and one by one. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. several “outside variables” (product taxes. When petroleum gross product margins were compared to their corresponding outlet throughputs. were selected for a detailed review of outlet economics. With few exceptions. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. This was integrated with selected NRCan price data. With the participation of several CPPI member companies. That such a relationship should exist was not surprising. wholesale product cost and freight charges) were isolated from the pump price. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. A wide range of petroleum gross product margins were evident. This provided for market-bymarket and regional comparisons of key competitiveness indicators. but also had significantly higher throughputs per outlet. MJ ERVIN & ASSOCIATES vi . to derive 1995 average petroleum gross product margins for each of the 19 markets. although this study provides an independent confirmation of this. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. rural markets.

an additional goal of this study was to undertake a comparison of outlet profitabilities. Consequently. which reflects his investment in the outlet. etc.6634Ln(x) + 76. corporate charity.000. not poor competition.• Smaller markets performed as competitively as larger centres. and his personal labour investment. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. brand advertising. This study showed that an average outlet net revenue in the 19-market study group was about $70. supplier profit: after the above costs are allocated. smaller markets.000.000.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.000 5. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000.000. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000.000 Volume (litres) 4. These costs would include salaries of marketing representatives and management. and/or distributed to shareholders. sales processing.962 R2 = 0. of which gross product margin and throughput are only two of several factors.6624 1..000 6. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. the residual revenue is available as profit to be re-invested into retail operations. head office and regional office overheads.000 3.000 2. revenues from ancillary operations (eg: convenience store.000. and in major vs.

at 1995 prices.000 vs. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. The Canadian retail petroleum products industry.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(150. 1. after allowing for estimated dealer profit and supplier overhead.000) $(350.market study group. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. Despite this difference.000 $200.000) $(100. suppliers likely incurred a net loss on outlet operations in 1995. Average Outlet Income (before marketing overhead costs) BC/PR $300. for which this study had no specific data.000 $50. respectively. and that petroleum sales revenues alone.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Although an objective measure of competitiveness is elusive.000 $100.$154. $61. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000 $150.000 $250. distant outlets are clearly higher than those associated with concentrated urban markets.000 per year. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000) $(200. by all objective measures available to this study.000) $(250.000) $(300. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. were insufficient to cover outlet costs.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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although pump prices in some markets can fluctuate by several cents per litre in the course of a week. serve as perhaps the most significant indicators of competitiveness in the downstream industry. When these margins were compared to their corresponding outlet throughputs. Thus. Also. Nevertheless. based upon an assumed posted rack price. Thus. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. When plotted against the margin-volume model.• • • improving production efficiency through refinery plant rationalizations (closures). That such a relationship should exist was not surprising. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). if Canadian average pump prices were only one cent higher than they were in 1995. Industry profitability is extremely sensitive to very small changes in pump price. this industry sector would have realized profits of unprecedented proportions. and the associated industry initiatives which are ongoing in nature. crude costs. Also. not excessive profits. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). despite the predisposition of many observers to use them as such. most markets. virtually all of the 19 study markets exhibited similar levels of competition. assuming all other costs were unchanged. 7. Thus. although this study provides comprehensive evidence of this. most outlets used in the 19-market study represent major integrated oil companies. Outlet throughput is a key determinant of inter-market pump price differences. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. in the long term these fluctuations are likely more reflective of market restorations. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. but to increases in underlying rack prices. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. Indeed. While these economics might appear to place this industry in a position of poor viability. had petroleum margins which were commensurate with average outlet throughput for that market. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . 8. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. these findings clearly show that pump price increases are ultimately linked not to increased profits. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. regardless of size. and in turn. Both the downward trend in margins. A wide range of petroleum gross product margins were evident within the 19market study group.

The loss of employment represented by a station closure may be of some concern to smaller communities. more isolated markets are generally higher than in larger centres. The costs of most consumer goods in smaller. This created some economic pressure to sell product at a higher pump price. which should. 9.5 million fewer litres of gasoline than a group A (major centre) station. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. in order to build upon the findings in this study towards a full understanding of the dynamics at work. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. average pump prices were relatively high. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. thereby improving petroleum volumes and ancillary revenues at the remaining sites. other factors exist which contribute to relatively high margins and prices. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. In suggesting this approach however. A full-serve retail gasoline outlet typically employs 3-5 staff. MJ ERVIN & ASSOCIATES xiii . This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. reducing the number of outlets may also reduce the number of competitors. which could actually inhibit competition. reduce pump prices. While competitiveness in most smaller markets was shown to be as active as in larger centres. according to the margin-volume model. poor outlet throughputs were generally the predominant factor. there are three points to consider: • • In very small markets. the solution would be to encourage some dealers to exit the market. • • At first glance. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. and this study showed that gasoline prices were no exception. isolated markets face particular challenges: although found to be highly competitive. it would seem that if local government in smaller markets were interested in lowering pump prices. Smaller.product margins than larger markets.

characterized by narrow product margins and relatively flat pump prices. depressed petroleum revenues. and the traditional automotive service bay. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and likely others in Nova Scotia. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. MJ ERVIN & ASSOCIATES xiv . is viewed as an agency which exists to the benefit of industry and consumer alike. and the perceived effect on their markets. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. has seen a decline in pump prices relative to other Canadian markets. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). The historical record is clear however: since deregulating pump prices. that where a healthy competitive climate exists. car wash. does not appear to benefit in consumer terms. The federal Competition Bureau for example. sometimes below that of outlet operating costs. and in turn. and as such. are an acceptable limitation on pure competition (Finding 8).10. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. the degree of price competition in the retail petroleum has in effect. is both the cause and consequence of increased activity in ancillary operations. will likely preserve a highly competitive petroleum market. Also. is well beyond the scope of this study. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. 11. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. under the current PEI regulatory structure. the Halifax market. as it does in the Canadian petroleum marketing sector. many national and local environmental regulations exist for good cause. Convenience store. as marketers find even more innovative ways to attract market share. This competition then. direct regulatory interventions may have an adverse effect on competitiveness. possibly to the detriment of the consumer. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). As these findings show. Retail ancillary operations are a critical element of petroleum price competition. This study proposes rather. Charlottetown.

Develop cooperative industry research into marketing sector competitiveness issues. using Canadian and foreign selected markets. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. petroleum marketing competitiveness. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Improve public understanding and awareness of competition in the petroleum marketing sector. along the lines of the model used in this study. 2. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. This should be in the form of a quarterly summary of price trends and related measurements. • • MJ ERVIN & ASSOCIATES xv . Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. and the converse image held in much of the public domain. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. not inhibit. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. in a simple format designed for consumers and legislators. would ultimately be reflected in carefully-considered public policy which serves to truly enhance.1. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Public perception measurement. and the nature of competitiveness influences. margins and competitiveness factors. using Canadian and foreign selected markets. A regular comprehensive competitiveness evaluation.

Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. consumers. and in particular. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. MJ ERVIN & ASSOCIATES xvi . Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and regulators alike. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. and issues/opportunities facing such markets. • * * * Better understanding of this industry.

. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.” MJ ERVIN & ASSOCIATES 1 .to analyze the rack to retail market and the market structure for refined petroleum products. .. or even communities within the same region. or petroleum marketing portion of the study. and in comparison to the Canadian national average and nearby USA markets”. the Canadian Petroleum Products Institute (CPPI).to determine the key factors which drive competitiveness in specific markets. competitive pressures from US and offshore refiners. A working group represented by Natural Resources Canada (NRCan).. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. region by region across Canada. . including a regional.. and Industry Canada was convened to undertake this project. face a number of challenges: a poor public image. Specific purposes of this study would be: • • • • “. and . and in the process. leading to more effective policies and reduced uncertainty for future investment.to better understand the competitive opportunities and challenges. The SCF laid the foundation for supplementary studies... to name a few...to provide a sound database upon which more effective policy decisions can be made. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made.. and a challenging array of potential environmental initiatives. and that issues and challenges be identified so that conclusions and recommendations can be made “.. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions.. and MJ Ervin & Associates was selected to undertake the “rack to retail”. which comprise the “downstream” oil industry.to help the industry cope and to enhance competitiveness. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.to draw comparisons with nearby USA markets. Project Objectives The working group established as the primary objective of this study “. In 1995.. and regional differences which face the petroleum products retail industry.Introduction Background Canada’s petroleum refining and marketing sectors.

and in order to provide insights into the range of competitive dynamics that can exist. Part D: Selected Market Study presents the findings of a diverse 19-market study. and a foundation for effective policy development. through a multi-faceted approach. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. It also relates consumer demand patterns to pump price fluctuations. The study does provide comparisons with US markets on a national level of detail. Many of the findings in this report are presented in graphical form. from which some important findings are made. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. in Appendix I. and the effect of competitiveness on each subsector. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Supporting data to these charts can be found in Appendix II. Unless otherwise stated. or which have a specific meaning in the context of this report. • Part E: Conclusions and Recommendations summarizes the study findings and. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. Part C: Historical Trend Analysis provides an overview of prices. margins and demand patterns over the past several years. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Ultimately. Findings are stated in bold and are summarized in part E of this report. undertaken as part of this project to: • make a more detailed examination of price. Specific comparisons of specific Canadian and US consumer markets were not made. presents conclusions and recommendations which arise from the study findings. due to the considerable data gathering difficulties that such an approach would entail. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 .The study meets these objectives. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure.

Ministère des ressources naturelles du Québec. Petro-Canada. and their 481 retail associates whose outlet data was used in our analysis. assisted in securing the support and participation of member companies in the selected markets phase of the study. CPPI. for their assistance. These included: Canadian Tire Petroleum.. Imperial Oil Ltd. MJ ERVIN & ASSOCIATES 3 . Suncor Inc. We gratefully acknowledge these companies. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. facilitated some of the data gathering needs of this study..• Industry Canada. through Bob Clapp. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). including Ultramar Canada. • • Several organizations participated in two key review sessions. and provided critical guidance and feedback at several key stages in the process. Suncor Inc. Ontario Ministry of Environment and Energy. Environment Canada. Finally. The Canadian Petroleum Products Institute. and Industry Canada. Petro-Canada. NRCan. through Maureen Monaghan and Huguette Montcalm. and also participated in the steering committee.. Shell Canada. and Shell Canada. chaired the steering committee. Natural Resources Canada.. Consumers Association of Canada.

unlike many consumer products. most Canadians relate to this industry in one specific way: as consumers.price . In fact. as they are in Figure 1. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. but simply. This price/margin model thus creates a common reference for understanding the economics of retail gasoline.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. the particular quality of gasoline which is of most interest to consumers is not its colour. Yet. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. its price. principally of motor gasoline. It is this particular feature of petroleum products .which is used by many groups and individuals to assess the competitiveness of the petroleum industry. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . multifaceted industry. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. These relationships can be modeled. or taste. And. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. texture. and serves to explain several factors that together determine retail gasoline prices at any given time. as this study shows.

Ultimately however. it is important to define the term “margin”.from the total pump revenue. MJ ERVIN & ASSOCIATES 5 . each essentially taking a share1 . margins are squeezed or expanded accordingly. While both perspectives are valid. this study’s use of the term relates to gross margin. So defined. Before examining each of the model elements. objective measurement for competitiveness. “competitive” may be synonymous with “viable”. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). From an industry perspective.or margin . Each margin is quantified by its defining prices. gross margin represents revenue only. evaluating competitiveness is therefore a partly subjective process. this study examines competitiveness from the latter. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. While this term is often associated with the phrase “profit margin”. and in fact inextricably related. (implying that the stated margin represents net income or “profit”). A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study.Many of the terms introduced and explained in this section are used extensively throughout this study. these stakeholder revenues are derived from the revenue from the retail sale. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. A consumer however. Gross margin is simply the difference between two price points. is more likely to equate the term with “value for money”. any operating expenses must then be considered before making any determination of profits. consumer perspective. an understanding of the term itself is necessary.

Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. Price competition.” Price Competition in the Oil Industry In order to assess competitiveness. it can frustrate communication and obscure analysis. Conditions for a competitive market can be deemed to exist when: • • more than one. and ideally many entities offer the same or similar products (brand variety).. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. the degree of competition within a market. The actions by business rivals place an upper limit on the prices a firm can charge for its products. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn.” “. and the entry of new competitors and new ideas. reducing costs. in the sense in which it is something in the public interest. Simply put. To achieve this. 1986: “Competition may mean very different things to different people. More importantly. as competitors seek to attract market share through lower prices. Inevitably. Accordingly. in order to maintain some level of brand variety. provide some means for comparing the type and to some extent. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. a universally acceptable definition of competitiveness is elusive. if market conditions allow a sufficient number of players to remain profitably engaged.Unlike many business or economic concepts. competitors can either restore higher prices or reduce costs. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. Technological change and innovation are the large levers of competition in industry. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. or in other words. Competition can only be sustained therefore. An effective functioning of markets also permits smaller competitors to expand if they meet the test. this usually requires a reasonable number of competitors. Since a competitive market effectively limits the price option. the result of price competition is reduced profit. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). improving efficiencies. one must ask how marketers compete.. is the only real option in the long term. represents a process by which prices are set. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . and unless care is taken to use the word precisely.

where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. Place. Ill. Nevertheless. in rack markets. the geographic scale of competition is an important consideration. and in retail markets. p. and are beyond the scope of this study. The converse notion that the industry establishes a “should be” margin.44 (1st Dec. MJ ERVIN & ASSOCIATES 7 .the variables at their disposal. or four P’s: Product. the most effective of these as a competitive tool is price. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. whose main activity is the exploration and development of crude oil. some organizations have operations in two or more of these markets. 4th Ed. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. and as will become more evident in this study.: Richard D. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. the raw material from which gasoline is made. 1960) 2 Although distinct. Price. (Homewood. Within the broad context of the oil industry. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. which in turn defines the margins. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. particularly in the crude (upstream) industry and refiner sector. In fact. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. and the downstream industry. is false. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. the “oil industry” consists of two distinct industries: the upstream industry. commonly known as the “marketing mix”1. so a brief description of these. whose main 1 E. • Thus described. and Promotion. which in turn defines a proper market price. 1971). A refiner in Toronto may well compete with a refiner in Buffalo. The dynamics of upstream and refiner competition are major studies in themselves. Jerome McCarthy. Irving. and are generally known as integrated oil companies. competition in the crude and rack markets deserves some mention.. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. New York. It is also important to stress that the market ultimately sets rack and retail pump prices. Given the commodity nature of petroleum products. Basic Marketing: A Managerial Approach. most Canadians relate more in terms of retail gasoline marketing.

our crude prices rise and fall according to price benchmarks established far beyond our own shores. from the exploration for potential crude or gas reserves. alongside major producing countries such as Saudi Arabia. rather than a fixed value. MJ ERVIN & ASSOCIATES 8 . gasoline grade. and transportation of crude oil to the refinery plant. production. in several commodities trading centres around the world. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. its marketing operations). implying that it fluctuates. Within the scope of this study. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. and the delivery and sale of these products to the consumer. drilling. The upstream industry’s crude price is represented in Figure 1 as elastic.activity is the refining of crude oil into petroleum products. Although this industry is not the focus of this study. In providing historical comparisons of crude to rack/pump prices. which gives an accurate portrayal of month-to-month crude price fluctuations. and in the open market structure that exists in Canada. that is to say. consequently. Canadian producers are known as “price takers” rather than “price setters” of crude prices. it is important to examine its relationship with its neighboring downstream industry. Canadian producers have virtually no influence over world crude prices. Infrastructure The upstream oil industry encompasses a broad range of operations. it is probably sufficient to say that. as a minor contributor to the world crude supply. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. which it does on a continuous basis. which finds and produces crude oil . due to variables such as crude quality. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. While this study focuses on the downstream industry (and in particular. Crude oil is a commodity which is traded in a global marketplace. and refinery production methods.the raw material from which gasoline is made. Canadian producers must compete to sell their production to refiners.

Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. put simply.While some suggest that the price of gasoline should rise and fall exactly with the crude price. was 19. involving energy. and marketers who. drill for. and lubricants. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. and hopefully realize some production. and from this feedstock. is called the refinery. or roughly 34 percent of the pump price. and numerous safety and environmental safeguards. diesel. its predominant feature is the plant facility which. in the petroleum sector. buy refined products from the refiner and sell them to the end-use customer. crude is only one of several factors that influence pump prices. manufactures a range of refined petroleum products including gasolines. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. which in oil producing provinces such as Alberta. heating fuels. This sector acquires crude oil. personnel. and pay out royalties to the resource owner. In addition. As is typical of many manufacturing organizations. maintenance. From this revenue. and some attention to the refiner sector is therefore given here. day-to-day plant operations are cost-intensive. A modern refinery is a sophisticated work of engineering. The focus of this study is on the marketing sector of the downstream petroleum industry.1 cents per litre. MJ ERVIN & ASSOCIATES 9 . who manufacture petroleum products from crude oil. as a factor of the regular gasoline retail pump price. oil producers must explore for potential reserves. is the provincial government. As a general measure: Finding 2: 1996 average crude price.

contract price . rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. If for example.the price charged for immediate supply on an “as available” basis. 2 MJ ERVIN & ASSOCIATES 10 . While refineries are always rack price points. and a return on the considerable capital investment in the plant facility. but with no material effect upon the Gross Product Margin derivation. the gross refiner margin is the price at which the refiner sells its refined product. not the refiner sector. which may cause Gross Refiner Margin to be slightly overstated. Although contract and transfer prices are distinct from rack price. being squeezed or expanded between these two price points. the relative competitive strength of any given rack market is difficult to assess. refiners sell their product under a variety of arrangements. Of these three refiner prices. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. which can be broadly categorized as follows1: • • • rack price .Price/Margin Model Elements For simplicity. which provides an independent and objective determination of rack-based gross refiner margin. external measurement of the current market value of a particular petroleum product. as this price point exists within the marketing sector. 1 Dealer Price is not included here. many of which do not have integral refineries. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. reflecting the cost of transporting the crude from the producing region to the refinery plant. Since both crude and rack prices fluctuate according to market forces. they use rack price as their basis. On a national basis however. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. only rack price information is readily available in the public domain. Wholesale volume data is not readily available on a market-specific basis. as they relate to negotiated. less the price at which it bought its raw material2 (rack price minus crude price). For a competitive rack market to exist. since the market-driven rack price provides an objective.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. Contract and transfer prices are not openly shared. In fact the refiner typically pays a higher price than the benchmark crude price. this model only uses the benchmark crude value. a considerable volume of petroleum product must actually trade using rack price as the transaction basis.this is the “internal” price charged by a refiner to the marketing arm of the same company. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. and accordingly. In simple terms. transfer price . This margin provides for plant operating costs as described above. some clear competitiveness indicators exist. The existence of rack price in a given market is not of itself. indicative of a competitive wholesale rack market. confidential terms between the seller and specific buyers. there would be little or no market-driven competitiveness in the refiner sector. representing major Canadian population centres. For simplicity. In fact. the gross refiner margin is elastic.

in order to maintain realistic accountabilities within each of the two sub-sectors. as there is no obvious market mechanism to regulate its setting. potential sources of wholesale product supply for most Canadian non-refiner marketers. petrochemical producers. 1 Based on Octane Magazine Retail Outlet Survey data.for example. In examining the structure of the Canadian refiner sector. integrated refiner-marketers establish transfer prices at. this limits a marketer to a relatively short range (perhaps 1. to so-called “independent” petroleum marketers. due to the relatively small transportation cost. would produce better than expected refiner income. In these cases of so-called “integrated” refiner-marketers. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. or close to. and which supply petroleum to about one-third of all retail outlets in Canada1. but with their US and European counterparts. As shown in Figure 15 (page 35). There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. to major industrial consumers. who themselves do not refine petroleum products.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure .000 km) for overland truck transport. Integrated Refiner-Marketers In Canada. Canadian refiners must therefore be price competitive not only with each other. market-driven rack prices. market-driven Rack (wholesale) pricing of petroleum products. but where pipeline or marine fuel terminal facilities exist. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. and in the case of gasoline. from any one of several regional refiners. but at the expense of marketing income. for example. The mechanisms that drive rack prices are more fully discussed on page 36. even overseas. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). wholesale refined product is bought and sold across very large distances. In practical terms. arises. MJ ERVIN & ASSOCIATES 11 . who compete for a share of this demand. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. most refiners also participate in the marketing and retailing of petroleum products. many US and European refineries are in practice. the question of the internal selling price. or transfer price. In practice.

gasoline price and competitiveness issues attract considerable public. as a popular and relevant “window” on the petroleum marketing sector. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. and purchase at or near the established rack price. Marketing operations within this sector can be broadly classified into three elements. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. Retail Sales to the domestic motorist. It is this sector which has direct contact with the petroleum consumer and it is this sector. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. media and regulatory attention. and who essentially deal directly with the refiner. trucking. the most recognized element of the downstream oil industry. and aviation. home heating. which “sets” the retail price of gasoline. • • MJ ERVIN & ASSOCIATES 12 . in the minds of many consumers. Wholesale Sales to a wide variety of customers. Within this industry sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. each with its own distinct infrastructure.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. farming. For this reason. product is sold from a central facility. principally into commercial trucking operators’ vehicles. including mining. or in the case of cardlock facilities.

Retail outlets are operated in a variety of modes.300 bulk sales outlets in Canada. to the motorist consumer. typically at the “rack point”. usually involving some aspect of the marketing sector infrastructure. Sales of aviation fuels at major and secondary airports across Canada. using delivery tank trucks. Direct sales generally do not involve any marketing sector infrastructure. according to the contractual relationship between the supplier and the dealer. Before examining this sector in detail. to the aviation fuel consumer. as discussed. There are over 1. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. There are about 16. and regular gasoline in particular.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. by delivery tank truck. In major centres dedicated Home Heat centres provide this service. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. and usually supply customers by delivery to the customer’s own storage tank. MJ ERVIN & ASSOCIATES 13 . These outlets usually have considerable inventory capacity. for example. Sales to non-refiner petroleum marketers. Sales of home heating fuels to residential furnace oil customers. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales of petroleum products through bulk sales outlets. one final element of the pump price model must be reviewed. often delivered by pipeline or ship/barge. Sales to commercial and industrial accounts by the wholesale marketing sector. in smaller centres. which is generally less than the rack price. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. at a negotiated contract price. There are over 850 cardlock outlets in Canada. as principal elements of petroleum marketing operations. heating fuel delivery is an integral part of a bulk sales outlet.500 retail gasoline outlets in Canada. Sales to spot buyers at posted rack price. Sales of petroleum products (principally gasoline) through retail gasoline outlets. such as product transport and/or storage. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Sales to major industrial accounts.

or roughly 50 per cent of the pump price. stable amount. for example. provincial sales tax. A three-cent drop in pump price.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin.2 cent (0. 1 Due to the application of GST (and in Quebec. typically made up of: • • • • a ten cent per litre federal excise tax. If the pump price decreases for example.6 cents per litre (Canada 1996 10-city average). this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. would include a roughly 0. The petroleum industry acts as a collector of these taxes. in a small number of markets. Table 2 shows the provincial tax content for retail gasoline. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. tax content does fluctuate somewhat with pump price changes. which amount to 28. municipal taxes. PST). the tax content of retail gasoline in Canada has increased steadily over several years.3 in Quebec) drop in the tax content. the tax content of the petroleum price is essentially a pre-determined. As part C of this study shows. MJ ERVIN & ASSOCIATES 14 . regardless of market conditions. and seven percent GST.

7 13.0 10.0 10.2 10.0 10.5 12.6 22. An additional pump tax of 1.6 3.0 3.0 10.0 GST content (7% of pump) 3.0 10.5 cents and 4.6 3.0 10.1 32.5 6.0 10.5 14.6 3.8 note 1 note 2 An additional tax of 1.7 30.0 10.3 Federal Excise Tax 10.6 3.5 Total Tax 24.5 3. plus a 6.0 15.8 4.Table 2: Taxes on Regular Gasoline on December 31.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 10.5% sales tax applied to the GST-inclusive pump price. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 14.0 28.4 3.0 9.0 4.9 3. MJ ERVIN & ASSOCIATES 15 .0 27. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.3 27.0 3.2 24. Provincial Tax 11.6 25.7 3.0 10.0 10.2 24.1 25. All Quebec gasoline sales are subject to a 15.2 cent per litre pump tax.7 18.0 16.3 10.0 11.3 20.0 28.5 cents was introduced in the Montreal and surrounding area in 1996.

Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.1 ¢ 5. or 9 percent. It also provides an overview of the industry in terms of several infrastructure parameters. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. including retail outlet distribution.2 ¢ 24. and potentially. and ancillary operations. MJ ERVIN & ASSOCIATES 16 . This 1 Prices and margins reflect a Canadian 10 city average. Refiner operations realized 5. to derive a representative value for regular gasoline gross product margin in Canada. or 50.1 cents per litre. based on regular unleaded gasoline. 3.3 ¢ 28.6 cents per litre.5 ¢ 0.5 cents per litre (after freight cost). The residual.3 percent of the average regular gasoline posted pump price. this section provides a view of the Canadian petroleum marketing sector.3 cents per litre.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.4 ¢ 19.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. operating modes. the brand supplier’s costs.8 ¢ TAX 28. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). or 34 percent of the pump price. Figure 2: 1996 Average Prices/Margins . namely the dealer’s costs and income. was available for product marketing operations. and the retail gasoline sub-sector in particular.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Upstream operations realized 19. some profit return for the shareholder.

The gross marketing margin. In 1996. In referring to marketing margins and product margins. is defined by the marketdriven price points of ex-tax pump price. this is seen as a “non-core” business.3 cents per litre.3 percent of the average urban price of regular gasoline in Canada. is usually the gas station. and rack price.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. three key findings can be stated: Finding 4: Finding 5: In 1996. which in the case of retail gasoline.5 cents per litre. and is then transported to the retail outlet. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. Freight MJ ERVIN & ASSOCIATES 17 . or “rack to retail” margin. See page 10 for further explanation. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Although many petroleum marketers conduct their own freight operations. The marketing sector then. and it is depicted in Figure 1 as a fixed cost element. As the product leaves the refinery plant. and is often out-sourced to third-party common carriers. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. was 3. as part C will describe. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. Based on the 1996 data. In 1996. Freight cost does not typically fluctuate. the finished product (gasoline. Both refiner and marketing margins have been in decline over the past several years. for example) is sold/transferred at the current rack or transfer price. is the second of two elements of the downstream oil industry. was 5. petroleum taxes accounted for 50. it falls into the domain of the marketing sector. Bloomberg rack price values were used as the assumed wholesale price. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market.

Posted pump price includes all of these variables.costs are generally less than one-half cent per litre in most major Canadian cities.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. and upstream/refiner margins.5 cents per litre in 1996. As represented in Figure 3. Unlike most other retail enterprises however. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). petroleum marketers. • Product sales: Within this domain. rural markets experience higher pump prices than do larger centres. as it excludes the “outside variables” of tax. incur a variety of costs.000 per outlet. an average gross product margin for regular gasoline in a major Canadian city was 3. Gross product margin is therefore defined as gross marketing margin less freight cost. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small.5¢ Product Operations Freight 0.1¢ Tax 28. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . storing and dispensing a product such as gasoline adds considerably to the operating cost. This is a particularly useful measurement in comparing retail gasoline markets. and is therefore a poor comparative tool.6¢ Refiner Operations 5. together with gas station dealers. which are typically close to a wholesale rack point. typical of any retail business. Figure 3: 1996 Average Regular Gasoline Margins (56. but at an average cost of over $200.8¢ Pump Price) Upstream Operations 19. freight. as it represents 80% of all retail gasoline sales.3¢ 3.

Although revenue from this product is factored into the study market economics in Part D. or when comparing price levels between markets. 4th Ed. and accordingly. (Homewood. Today. as gas stations proliferated. Price competition has forced marketers to optimize outlet revenue. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. commonly known as the “marketing mix2. additives. expanded product/services offerings such as convenience items. This study does not examine such a broad issue however. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. it represents a very small percentage of total retail petroleum sales. seasonal blends. etc. 2 E.” or four P’s: Product. and Promotion.). The grade differential varies somewhat from city to city. one must ask how marketers compete. and the price difference between these grades and the RUL price is referred to as the grade differential. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Irving. Today. will ultimately purchase based on price. marketers have attempted with some success to differentiate their product offerings from other brands. Price.. competitive strategy of this type focuses heavily on selecting the best place. marketers compete to be represented in as many and/or the best locations as possible. 1 Diesel is another petroleum product sold at many retail outlets. In order to measure competitiveness. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. gasoline). and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. Place. a number of factors preclude this type of strategy. propane vs.retail gasoline sales respectively1. 1971). Jerome McCarthy. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. Higher octane grades are more expensive than RUL.44 (1st Dec. Simply put. Ill. p. but most consumers view gasoline as a commodity. 1960) MJ ERVIN & ASSOCIATES 19 . In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. but in 1995 was typically 5 cents per litre for midgrade. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. • Product In the past decade.: Richard D. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. RUL prices are therefore most often cited when relating historical price trends. A portion of the market certainly responds to this type of competitive strategy. rather than the most places. and 9 cents per litre for premium gasoline. Basic Marketing: A Managerial Approach. marketers compete for the consumer’s choice of transportation energy (for example. page 24). Place Typically.

and more importantly. Examples of promotional competition are: • • • brand identity gasoline discount coupon. and due to the already slim margins available to marketers. Consequently. In this context. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. Promotion In the gasoline retailing sub-sector. Examples are: • prominently displayed prices . promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. free item with purchase or special price item with purchase.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. gasoline is viewed by consumers as a commodity uniform in quality and widely available. Establishing an objective measurement of price as a competitiveness indicator however. low prices and/or margins.• • closure of non-viable outlets. and therefore “trades” within a relatively narrow price range. Promotional activity seems to have decreased in the past few years. volatile prices . As such.contrary to some public perception. their subsector margins. volatile pricing manifests itself in the form of a price war (see below). This study presents an extensive historical and comparative analysis of pump prices. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. this study examines the dynamics of price competition in considerable detail. gasoline is a commodity. probably due to its relatively high cost. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. is less clear. MJ ERVIN & ASSOCIATES 20 . • Price In most markets. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. • • • While examples of all of these indicators are abundantly in evidence. uniform prices . due to the largely commodity nature of petroleum product. caused by price competition. fluctuating pump prices are a significant indicator of robust competition among marketers. price has proven to be the most widely used competitive tool by gasoline marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. At its extreme.

its effect is to restore some measure of the dealer margin. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. Pump price signs are an ubiquitous feature of the retail gasoline industry. the relationship between the supplier and dealer is generally as described on page 25. but to competitors. Pump prices therefore tend to move uniformly within a very short time. 1 This does not occur at company operated or commission outlets. since they too must restore their gross product margins to sustainable levels. Whether through falling pump prices or rising rack prices. or when prices rise or fall apparently in unison. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. MJ ERVIN & ASSOCIATES 21 . When this occurs.When pump prices are uniform. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. The effect of this upon the gross marketing margin is obvious: it is squeezed. or even being squeezed to zero . Finding 7: Price uniformity and price volatility. competitors may not follow. Price Support In times of “normal” pump prices. obviously at the expense of the supplier margin. or even undercut the competitor’s lower price. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. or even less than. in order to maintain a reasonable market share. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. the supplier may temporarily intervene. If the posted price increase is too high. competitors will likely match this price. facilitated through street price signs.where the ex-tax pump price is equal to. who then react quickly to the change. bypassing the higherpriced outlet. To understand the phenomenon of uniform pump prices. While this support may take one of several forms. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. This is a misconception. assuming that the rack price is unchanged. since there is no “dealer margin”. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. for example). In the case of lessee or independent dealers however. the wholesale rack price. one must adopt the perspectives of both consumers and competing. The other dealer has little choice but to quickly match. and provide to the dealer what is commonly referred to as price support. are indicators of a competitive market. adjacent dealers. in an attempt to gain market share. the effect on many consumers is immediate: they will drive into that station. If one dealer decides to reduce pump prices (by two cents.

The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. but reverts back to the dealer when the support arrangement is ceased. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. the petroleum marketing sector has been the subject of several inquiries at federal. There are few current examples of direct government intervention in the pricing of petroleum products. More recently. In addition. control over retail pump price effectively reverts to the supplier. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. which is administered by the federal Competition Bureau (Industry Canada). Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”.Under the provisions of some price support mechanisms. 1997 MJ ERVIN & ASSOCIATES 22 . provincial and even municipal levels. An examination of the effect of the Competition Act. These cases have largely involved local dealers and/or isolated incidents. and a brief discussion of this case appears in part D. or of direct government intervention in marketing. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. however. is beyond this study’s scope. Following a year-long investigation. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. In addition. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. While this study does not intend to undertake a detailed review of the effect of the Act. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. the Bureau found that there was no evidence to support these allegations1. resulting in 9 convictions. A review of historical retail pump prices in the Halifax. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996.

or incentive for. So defined. promotes or limits market-driven pump prices. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. accounting for roughly 88% of all gasoline demand. Many smaller retail owner-operators. accounting for 41% of all petroleum demand. accounts for about 37% of all refined petroleum demand in Canada. and at least some of this capital cost is regulatory compliance-driven. entry into an attractive market. a competitive climate. it is clear that government policy plays an important role in facilitating. as outlined above. particularly in smaller population centres. but exist to meet other important societal needs. it is the single largest one. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. It is important to acknowledge that many regulations affecting the retail gasoline industry. or inhibiting. in the form of standards for the decommissioning of retail petroleum sites. These regulations clearly exist to the benefit of all. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). and consequently. exit from an non-viable market. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. sales of gasoline through the roughly 16. that is. to some degree. inhibit competition. This issue is discussed more fully in part D. one can cite examples of regulatory obstacles to exit from the retail gasoline market. As a product group however. Conversely. creating a need for higher margins. and is the single largest market for gasoline products. MJ ERVIN & ASSOCIATES 23 . or incentive for. creates an obstacle to. A practice. is in part. higher pump prices. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. The high cost of building a modern retail gasoline outlet for example. for safety and environmental protection.500 retail gasoline outlets across Canada. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. Retail gasoline sales.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices.

This study provides an estimate of the actual retail outlet population. Figure 5: Canadian Retail Outlet Population .Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.9% Diesel Fuel 22.2% Retail Gasoline 37.2% Propane /Butane 2.7% Lube/Grease 1.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . as shown in Figure 5.9% PetroChem Feedstocks 5. This survey accounts only for major established retail networks .6% Other Gasoline 4.3% Total Sales Volume: 84.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.7% Light/Heavy FuelOils 14.2% Asphalt/Coke 4.it has no practical means to enumerate each and every outlet.2% Other 0.

and usually owns the brand name seen at the retail outlet. Several possible relationships. as one might expect.The estimated number of retail outlets in Canada has declined from 22. or modes. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. and all inventory and revenues belong to the supplier. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 .000 outlets in 1989. controls the setting of the pump price. using Octane counts only) is roughly equivalent to population densities.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. to about 16. who manages the day-to-day operations at the retail outlet. Distribution of these outlets by province (Figure 6. the retail outlet is owned and operated entirely by the product supplier. who holds initial title to the refined petroleum as it leaves the rack point. as owner of the product. and this is of some importance with respect to the matter of prices and competition in this sector. The supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. The principal dealer and attendants are salaried employees of the supplier. and the dealer. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. exist between retail dealers and their suppliers.500 in 1995.

and pays them from his commission revenue. the outlet facilities and petroleum inventory is owned by the supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. Control of Pump Price Dealer Compensation supplier a commission from the supplier.sub-component margins . but the outlet operator (“dealer”) is compensated by a commission payment. The “dealer” is in essence. supplier salary from supplier. the supplier retains control of the retail pump price. Since the supplier owns the petroleum product at this type of outlet. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The dealer in turn hires attendants. an employee of the supplier supplier supplier typically the dealer. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . who pays all outlet operating costs. based on pump sales volume. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.the entire gross product margin accrues to the brand supplier. usually based on cents per litre of petroleum sales.

less the Dealer (wholesale) Price charged by the brand supplier.product from the supplier at a “Dealer Wholesale” price. This dealer margin is defined as the pump price (ex-tax). and means of compensation supplier. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. can vary considerably from one supplier to another. not the supplier. the retail facilities are owned by the dealer. The dealer pays most or all of the expenses associated with operating the outlet. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. dealer-established retail price. and sells at the posted pump price. MJ ERVIN & ASSOCIATES 27 . The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. and in turn resells to the motorist consumer at a higher pump price established by the lessee. The margin between these two prices is the dealer’s gross revenue. since it is predicated on contractual arrangements between the dealer and the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. This Dealer Price. and has control over the retail pump price. unlike rack or pump prices. and sells at the posted pump price.

MJ ERVIN & ASSOCIATES 28 . This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. and fully two-thirds operate as lessees or independents. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. virtually none of the major integrated outlets are company operated. Petro-Canada. The remainder represent one of over 50 different marketer organizations. some general figures are mentioned here. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. who themselves establish pump prices.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. during a price war) as previously described. or Imperial Oil). Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. In addition. 1 Unless the dealer is under a price support arrangement (for instance. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1.

Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . more fully described in part C. Figure 8 depicts the Canadian representation of several key ancillary services. Based on a sampling of outlets surveyed in this study. Most ancillary services are operated by the dealer/lessee. Canadian throughputs have dramatically improved in the past several years . the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Many outlets have more than one ancillary offering: many “flagship” outlets for example. to over five million litres in major markets such as Toronto.While an average outlet throughput may be in the order of 2.5 million litres. ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. In fact. reduced petroleum margins. average annual throughputs ranged from under 1 million litres in smaller population centres. In effect. which in part has led to a reduction in retail product margins.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. Improved outlet revenue from ancillary operations has caused. These improved outlet throughputs have provided for improved petroleum revenue potential. feature both a large-area convenience food store and a modern car wash facility. these study findings show that this can vary widely from market to market. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. has had a profound effect on the retail gasoline marketing sector. and is a result of.

would be somewhat higher. as can be seen in part D of this study. This part examines broad trends in several areas. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. using a Canada 10city weighted (by provincial demand) average. As such. including smaller markets. This shows that pump prices have increased in nominal terms. mainly using Canada average values. MJ ERVIN & ASSOCIATES 30 .Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. An “all markets” average. the “Canada average” price reflects an average of urban markets only1. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. While some of the presented findings are selfexplanatory. Since rising prices are common to most consumer goods and services. and with which the reader should be familiar. Since 1 Data is not regularly collected on smaller markets. prices are for regular unleaded (RUL) gasoline. many utilize terms which are explained in part A. particularly around 1990. Regional and market-to-market comparisons are presented in greater detail in part D. when the Persian Gulf War caused crude prices to increase significantly. an examination of the specific historical record of gasoline prices is useful. Unless noted.

When compared to other consumer goods. as in Figure 10. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. as defined in part A of this study. MJ ERVIN & ASSOCIATES 31 . It also depicts the associated margins. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. retail pump prices were about 7 cents less in 1995 than they were in 1986. nominal pump prices decreased. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995.1990. Figure 10: CPI Index Comparison . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. When pump prices are reduced by the amount of tax content. and relative crude cost. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. In constant dollars. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. ex-tax equivalent prices. rack price. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices.

as shown in Figure 12. due to additional market factors which affect pump and rack prices at any given point in time. Figure 12 shows that industry margins have not been constant over time. and have risen slightly since 1994.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. are principally a reflection of changes in the underlying price of crude oil. the presence of these additional market factors have operated to the benefit of consumers. that is. In fact. which in turn. as might be suggested. If. MJ ERVIN & ASSOCIATES 32 . then one might expect margins to be quite constant over time. it simply passes on a fixed cost margin to determine the “correct” pump price. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. as Figure 11 shows. nor do rack prices exactly follow crude costs. the downstream industry operates on a “cost-plus” basis. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. it is also useful to examine the behavior of margins. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. as the next section shows. Margin History While Figure 11 provides an indication of key price trends. and in fact have displayed a declining trend over the past six years. and the rise in the tax content. which are defined by the price points. It is important to state that pump price changes do not occur in exact lock-step with rack prices.

which have both shown a consistent decline throughout the period 1991 to 1996. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. several factors. not weekly or daily data. the actual fluctuation is much more pronounced than shown. the gross marketing margin can fluctuate quite significantly1. In particular. A more thorough discussion of specific market factors for these and other centres appears in part D.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. 1 In fact. Finding 13: From 1991 to 1996. since the chart is based on monthly averages. this upward trend is not attributable to “downstream” refiner or marketing sector margins. and has been a result of. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .crude) 5¢ Marketing Margin (retail . as local competitive factors act to self-regulate pump prices. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. This shows that on a monthly basis.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. MJ ERVIN & ASSOCIATES 33 . emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. The decline in refiner and marketing margins has both resulted in. compared to the Canadian average. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.

with and without tax. or even less than. This shows that. US Price History The retail gasoline tax structure in Canada is vastly different than the US. although Canadian pump prices in urban markets are clearly higher than in the US.Figure 13: Monthly Gross Marketing Margins. US pump prices. for several years. is presented in Figure 14. A comparison of Canadian and US regular gasoline pump prices. On an ex-tax basis. if not all of the difference in pump prices between Canada and the US.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. This difference accounts for most. this is wholly attributable to the difference in taxation. Canadian pump prices have been roughly equal to. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . resulting in significantly higher Canadian gasoline prices.

Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. • Although this study shows that on an ex-tax basis. While these trends have also occurred in the US. From this it can be seen that Canadian and US rack prices. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. have improved considerably. Figure 15 compares these values for selected Canadian and US centres over a period of several years. as a result of outlet closures (see Figure 5. Prior to 1994. both a cause and an effect of improved throughputs and ancillary revenues as previously described. when compared on an ex-tax basis. trading at any given time within a relatively narrow (about 2 cents per litre) range. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . This would be a useful area for further research. This is no longer the case however. Canadian ex-tax pump prices were historically somewhat higher than in the US. Canadian outlet throughputs (although likely still less than those of the US). behave in a very similar fashion. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. page 24) and somewhat increased demand.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. RFG has not been introduced to Canadian markets. which is reflected in US average pump prices. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. and moving up or down more or less in unison.

and as would be expected in any commodities market under these conditions. or indeed anywhere. increasing significantly every spring. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. Simply put.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.000 2. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).100.000 1. Gasoline price exhibits a similar. Yet in the latter half of each year. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.700.500. but in fact across the North American continent (US demand follows a similar pattern). or sales.900.900.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.000 34¢ 2. Price History Figure 16 shows the history of Canadian gasoline demand. conditions begin to favour a “seller’s market”.500.000 24¢ 1. as demand ebbs and inventory improves. rising and falling closely in step with demand. of motor gasolines from 1991 to 1996. and prices tend to fall. Demand vs. albeit less distinct pattern. not only in a given market. a “buyers market” develops.000 2. Figure 16: Monthly Demand vs. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . and falling in the latter half of each year. compared to average ex-tax regular gasoline pump price for the same period.100. Pump Price (nominal ¢/litre) 3. the price tends to be bid upwards.700. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. As non-refiner marketers attempt to secure a supply of this diminishing inventory.300.000 2.000 2.000 1. Gasoline demand exhibits a very regular seasonal pattern.

This part of the study presented a number of historical views of retail gasoline prices.3%. the downstream petroleum industry. a feature of most marketregulated commerce. The traditional supply-demand model predicts that when demand rises.Whether in the spring or the fall. has operated in a highly competitive environment. and product taxes which add to the consumer price of gasoline. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. which consists of the refiners and marketers of gasoline and other petroleum products. while world crude prices and Canadian taxes have generally increased over the past several years. demand rose approximately 8. while average ex-tax pump price declined by 14% (since 1994. so do prices. pump prices have increased due to a significant rise in crude costs in this period). the essence of a free market economy. their related product costs and margins. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. in that prices have fallen. This is of course. competing to meet their own needs. Figure 16 shows that from 1991 to 1995. MJ ERVIN & ASSOCIATES 37 . which ensures a competitive product price for buyer and seller alike. gasoline prices have not followed the traditional model. On a long-term basis however. All of the findings suggest that. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. despite a rise in demand. as evidenced by declining industry margins. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market.

outlet volumes. play a role in a market’s pump price. there is no regular monitoring of pump prices in smaller centres. and pump prices alone provide very little opportunity for “comparability”. Nineteen markets were therefore adopted for the study (Table 3). although one was subsequently dropped due to insufficient submitted data. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price. • Methodology Selection of Markets A number of markets were selected for the study.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. and in order to provide insights into the range of competitive dynamics that may exist. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. etc. These “outside factors” tend to obscure the more relevant aspect of pump price. outlet costs. is useful in providing broad overviews of industry price and margin trends. ancillary revenues. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. namely product margin. freight. A number of factors such as taxes. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. MJ ERVIN & ASSOCIATES 38 ..

Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations.Each market was classified according to regional affiliation (BC/Prairie. In all. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. the gross marketing 1 Although White Rock is clearly not a major centre by itself. it was essential to obtain data not normally available through existing public sources. price history data not available through public sources. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. and Group B markets less than 500. Suncor Inc. retail outlet and brand representation. and Canadian Tire Petroleum.are influenced not by one. To this end. Five companies responded to this request: Imperial Oil.0001. MJ ERVIN & ASSOCIATES 39 . Ontario.and consequently competitiveness . the gross marketing margin must be examined in isolation from those other variables. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. 2 Depending upon the outlet mode. In addition. Process Overview As illustrated in part A.000. Petro-Canada. Shell Canada. To examine the competitiveness of the marketing. retail pump prices . and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. Furthermore.. but a number of variables. and for smaller markets. these organizations provided market-level data on freight costs. or “rack to retail” sector.

From participant company supplied data. Where applicable. tax content. 2 Accordingly. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). in addition to operating cost and ancillary revenue data gathered in the study1. weighted by sales demand. as the “blended” price includes other product grades. and the final “rationalized” gross product margin was determined for each market. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. 1 Although outlet cost and ancillary revenue data was not available for all markets. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. 2. these were weighted by volume. and freight were successively removed from the pump price. This allows for an accurate determination of net outlet revenue. by product grade. The gross product margin thus serves as an interim basis for comparing study markets. Where differences in gross product margin might still exist. rack price. Group B (smaller market) and 19-market study averages. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. Finally. Using the derived gross product margins and volumes for each market. For each market. including some smaller centres. 1995 average values were determined for pump price. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. 3. MJ ERVIN & ASSOCIATES 40 . to arrive at “blended” values2. average outlet annual throughput was determined for each market. average pump prices are higher than actual average regular gasoline prices. The variables of tax content.margin is stripped of its freight component. and freight. a broad representation of markets was possible. rack price. a market-by-market profile of outlet income is presented. to derive the 1995 average gross product margin for each of the study markets.

Bloomberg rack price values were used as the assumed wholesale price.. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. represent a broad range of markets. it is important to understand that the use of rack price in this analysis has certain implications. a recognized source of data on world crude oil and petroleum markets and prices. encompassing a significant portion of the entire Canadian market.. These differentials do vary from one market to another. so that on a cents-per-litre basis. and from one brand to another. accurate comparisons are possible. average revenues from ancillary services were added. When these margins are applied to outlet throughputs as in step 4 above. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. also considering that RUL constitutes the majority of product. This variation is constant across all nineteen markets however. 6. marketing margin.. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™.. 5. . and gross product margins are therefore likely to be understated. In referring to marketing margins. and therefore where assumptions were made. or consolidated net incomes. Supplier Overhead costs. This value was then applied to the gross product margin to determine average outlet petroleum revenue. freight. perhaps by 1 to 2 cents per litre. etc. MJ ERVIN & ASSOCIATES 41 .7 million. many wholesale petroleum purchases are made at less than the “posted” rack price. the effect on the “blended price” is small. objective data exist for both of these values. From participant company data. as described on page 10.to determine average consolidated net revenue per outlet. and outlet operating costs were deducted from total revenue.4. and supplier profit. Also. Unlike retail pump prices however. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. Wholesale refined product prices used in this study are therefore likely to be overstated.. Interpretation of Data In some smaller centres. product margins. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. including relatively smaller ones such as Sioux Lookout or Gaspé. A dollar-per-outlet estimate of these elements was made. The derived weighted average values of pump price. While clear. grade differentials were based on known differentials of nearby markets. 7. petroleum revenues. but they are relatively minor. these 19 markets represent a combined population base of 8. and accordingly represent a broad spectrum of consumers and marketers.

38 cents per litre in ex-tax pump price. The first of these variables to be examined is tax. table J for an explanation of how variance is derived. The study data suggests that variations in tax rates account for a significant part of pump price differences. accurate. A 6. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. there is little to suggest why such a high variance exists. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. The data shows a statistical pump price variance of over 17 cents per litre within this study group. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. Tax Figure 19 shows posted pump prices for the study markets. and based on objective.8 cent difference in pump price 1 See footnote at Appendix II.64 cents per litre in pump price. The data also shows that typically. while lower prices tended to prevail in major centres. The 19-market study group exhibited a statistical variance1 of 17. but a variance of only 12. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.Rack prices used in this study are nevertheless market-driven. higher priced markets are associated with smaller population centres. independently gathered data. broken into tax and extax components. MJ ERVIN & ASSOCIATES 42 .

it is therefore more useful to use ex-tax pump prices when comparing any two markets.tax. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. Montreal). taxes were a significant element of pump price.75 cents per litre (Vancouver.between Calgary and Vancouver for example. while taxation between provinces is more pronounced . the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. but the variance is minimal .while all markets are subject to the same rate of federal excise tax and GST1. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. MJ ERVIN & ASSOCIATES 43 . was less than three cents. GST content can vary by market. namely the upstream industry and refiner sector. Figure 19: Pump Price . accounting for roughly half of the average retail price. when examined on an ex-tax basis. 1 Due to pump price differences. or when examining historical price trends. provincial tax rates can vary greatly.less than one-half cent per litre. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. thus providing a better basis for comparison. This eliminates any effect that tax variability may have. additional elements of the revenue stream must be further isolated. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. In all study markets. The data shows that taxation between markets within the same province varies little. as described in part A.

and therefore are best analyzed separately. the rack price is equivalent to the upstream margin plus the refiner’s margin. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. When rack price is deducted from the ex-tax pump price. MJ ERVIN & ASSOCIATES Cents per litre 44 .assuming transport costs did not outweigh the price difference. Freight costs are additional. rack and pump prices. as is examined below. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. reflecting some differences in refinery crude acquisition costs. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. and their respective margins.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. differ little from those of major centres. To address this. the validity of analyzing gross marketing margins in isolation might be raised. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. are clearly delineated by market-driven crude. it should be restated that each of these sectors. as this would cause rack buyers to bring product in from the lower-priced region . the rack price is set at the rack point (Winnipeg. if a clear understanding is to be achieved. rack price) and gross marketing margin elements. one region cannot maintain rack prices at a higher level than another. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. This is due to the fact that for any market. reflecting the reality that at the rack level of competition. in the case of Thompson). but ultimately. Furthermore.

MJ ERVIN & ASSOCIATES 45 . as low as 0.0 cents per litre. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. it is essentially a “non-core” business. Although freight operations are often an integral part of many petroleum marketing operations. with their component freight costs. in fact. the data shows that freight is often a significant part of the gross marketing margin.3 cents per litre. Figure 21 shows a study market comparison of gross marketing margins.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. it is therefore important to eliminate the freight variable from the gross marketing margin.16 cents per litre (gross marketing margin) to 7. Before using this as an analytical tool however. generally smaller markets. Two of the study markets had freight costs in excess of 3. To provide a comparative view of the marketing dynamics within the study group. and therefore a significant pump price factor. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. For markets which are also established as rack points. one final outside variable must be isolated: that of product freight. For other. this freight cost is almost negligible. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences.49 cents per litre (gross product margin). particularly in comparisons of major urban markets to small. resulting in comparative gross product margins. remote population centres.

5 cents per litre average Gross Product Margin cited in Part B. petroleum revenues.68 cents per litre. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. at 14. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. For all study markets. was the lowest.5 cents).6. Group A (larger population) markets averaged 5. A 7.06 cents per litre. while Toronto. 1995 gross product margin averaged 5.95 cents per litre. MJ ERVIN & ASSOCIATES 46 .the gross revenue available to the petroleum marketing sector for its operations. product margins. In referring to marketing margins. The study revealed that: • • Retail gross product margins differ very little between major urban markets .22 cents per litre Smaller markets showed a wider variance in gross product margin .68 cents per litre1. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. to the resultant retail gross product margin . as the 3.17 cents per litre.a variance of only 2.42 cents per litre.5 cent variance in gross product margin is still significant however.6 cents) to the variance in their component gross product margins (7.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. or consolidated net incomes.5 cent per litre average relates to regular gasoline in major markets. or between any two regions. Gaspé. while Group B markets averaged 7. Bloomberg rack price values were used as the assumed wholesale price. at 3. was the highest of the study group.

it would likely be so unprofitable as to be un-viable.2 cents per litre in Gaspé. a wide range of variability still exists between markets in the study group . Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000 1. A wide range of volume performance is evident.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000 Litres 3. if any retail gasoline outlet located in the Toronto area for example. vs.000.000.000 litres per year (Sioux Lookout) to over 5.000.000.1 cents per litre in Toronto. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . Figure 23: Average Annual Throughput per Outlet 6.000. an examination of related outlet throughput volumes is necessary. Indeed.differences between markets. If these two factors are related to each other as they are in Figure 24. once isolating retail gross product margin from all of the “outside” pump price factors. for example.14.000 5.000.000 2. 3.000 litres per year (Toronto).000 4. ranging from under 700. sold significantly less than 5 million litres of petroleum per year.

they remain essentially the same regardless of volume changes .000.6634Ln(x) + 76.000. As most outlet operating cost are fixed in nature .000 3.4 million litres annually.Figure 24: Outlet Volume vs. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. all market groups (BC/Prairie.000 6. If all outlets in a given market experience generally low throughputs.000.000.000. With few exceptions. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.that is. compared to 2. Ontario. while those with high Gross Product Margins tend to have low outlet throughputs. the Group A market outlets had roughly 50% more throughput than Group B outlets . not of poor competition.962 R2 = 0. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. On average however. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. Smaller markets perform as competitively as larger centres.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.6624 1. it follows that higher gross product margins will be the consequence. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. Regionally.000 5.7 million respectively. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. Although MJ ERVIN & ASSOCIATES 48 .42 cents) than smaller (Group B) population centres (7.000 Volume (litres) 4. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.000.000 2.95 cents).

Figure 25: Outlet / Volume Relationship . ancillary sales.000 5. It represents the residual revenue which is available to the dealer and to the supplier.000.000 3. which for the study group.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. in addition to petroleum sales.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.000. two additional factors are introduced: ancillary revenue and outlet operating costs. and ultimately shows that very little difference in competitiveness exists between any two markets. Gross product margin. and the resultant consolidated net revenue.000 2. competitiveness occurs between retail outlets. and must be examined. supplement their incomes with other revenues. as described below. while operating costs are those costs which are directly incurred in the operation of the retail facility. this is likely due to the higher incidence of Group B study markets within this region. and auto service. supplier overhead costs. Consolidated Net Revenue per Outlet To create a complete.000 6. averaged $69. such as convenience stores. Ancillary revenues are those derived from non-petroleum sales sources.000.000.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. however. product cost.000 4. and supplier MJ ERVIN & ASSOCIATES 49 . Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). is only a measure of petroleum revenue per litre.000.the revenue available for dealer income. In reality. car wash.716 . Figure 26 summarizes total outlet petroleum sales. outlet-based view of retail markets. less outlet costs. and incur many expenses in the course of their commerce. which.000. These additional factors clearly have an effect on the relative competitiveness of retail markets.

In effect.000 $150. Table K). An examination of these component elements reveals a significant finding: that for most markets. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. which reflects his investment in the outlet.000 $50. these ancillary operations contributed to a lower product margin and consequently.000 per year respectively . Figure 26: Outlet Revenues. Costs.000 $250. As described above.000) $(100.000) $(250.000 vs. $60.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. Finding 19: Based on published rack prices.000) $(150. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.000 $100. Income BC/PR $300. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(200. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.profits.000) $(300.000) $(350. causing the weighted average for Quebec / Atlantic to be depressed). and his personal labour investment.000 $200.Group B outlets were not as profitable as these revenue values might suggest. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. reduced pump prices.$154. as explained below.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. A discussion of the ultimate distribution of this revenue is useful. Most markets showed relatively similar net revenues (see Appendix II. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . MJ ERVIN & ASSOCIATES 50 . petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Vancouver collects a 4 cent per litre municipal tax.38 ¢ 7. This may explain the somewhat elevated gross product margin in this market. a 60. and also has local refining capacity. net outlet revenues were less than those of other major centres. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. but well within a cluster of markets with similar throughputs. Geographic / Supply / Freight cost considerations: As a port city.968 litres 7. Vancouver is also a terminal for a refined products pipeline from Edmonton. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Low consolidated net revenues may have contributed to the higher margin. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.000 1. Overall.658. The somewhat high margin placed this market slightly above.542.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. ranking 11th.98 ¢ 0. contributing to a higher than average pump price.745 18 446 2.Vancouver population # of brands # of outlets outlets per 10. Influence of other markets: Although relatively close to the US border. as described below. Vancouver provides several perspectives into retail marketing. while average throughput ranked 4th.ex tax Canada Average . this market has access to numerous refiners along the Pacific coast through marine supply.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . and with access to wholesale product by several means. Figure 28: Vancouver .000 barrel per day plant located in the greater Vancouver area.

Influence of other markets: Although this market is a border-crossing community. prices. White Rock is essentially part of a major market due to its proximity to Vancouver. and retail gross product margin was less than that of markets with a similar population base. this market is subject to a 4 cent per litre municipal tax.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. Like Vancouver. Price history / Taxation: Although no specific data is available. thus providing some unique characteristics for the market study. the study data found little to suggest a material effect upon representation. adjacent to the United States border. prices in this market have historically mirrored those of Vancouver.98 ¢ 0. This is likely due to the fact that unlike many smaller markets. Geographic / Supply / Freight cost considerations:. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.315 4 8 4. the White Rock retail gasoline market displayed the same attributes as a major urban market.630 litres 7.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.604. Vancouver. but less than most markets with a small population base. due to its proximity to one. In all respects. White Rock’s margin was typical of markets with similar outlet throughputs. gasoline “cross-border shopping” is less pronounced than might be expected. This suggests that. at least in this market. MJ ERVIN & ASSOCIATES 55 . Average outlet throughputs were relatively high. Despite its relatively small size. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. This market is close to its usual rack point.45 ¢ 7. Freight costs were accordingly low compared to other small markets in this study. or competitive dynamics.White Rock population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.000 16.

Calgary population # of brands # of outlets outlets per 10.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. which was one reason for selecting Calgary as a study market. creating some competitive pressures (see Nanton).extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .000 710. Calgary had the third highest number of retail brands. Figure 29: Calgary . pump prices in this market have historically been well below the Canadian 10-city average. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Indeed. Other considerations: Of the markets studied.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Influence of other markets: Calgary is fairly remote from US and other major markets. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Calgary is of sufficient size to support a viable rack market.827.24 ¢ 6.ex tax Canada Average .47 ¢ 0. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis.675 27 313 4. Consolidated net revenue: was typical of other major markets in the study group. indicative of a strong competitive climate. Product is usually sourced from Edmonton refineries via pipeline. Price history / Taxation: As the figure below shows.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Rack-to-outlet freight costs are among the lowest in the study group. Calgary pump prices are very close to the Canadian average. Some smaller markets in the vicinity have occasionally priced below Calgary.719 litres 6. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.

000 179. Influence of other markets: Like Calgary. Ex-tax prices are also above average.ex tax Canada Average . Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. and therefore experiences no particular influences from any other major market. supply/demand is likely more balanced.21 ¢ 7. which are among the highest in Canada.50 ¢ 0. Since then.180 15 86 4. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.Regina population # of brands # of outlets outlets per 10. Regina was of some interest as a study market. Consolidated net revenue: was typical of other similar markets. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. this market is removed from other significant markets.089.794 litres 7. and is therefore a recognized rack pricing point. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . margins and throughputs were typical of other markets with a similar population base. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. This is partly due to provincial taxation levels. and a history of volatile pump prices. Since 1993.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Although no supporting data is available. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. it is likely that this reflected a surplus of wholesale inventory within the local market or region. price volatility has eased.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . and this market is now more typical of other large population centres. Figure 30: Regina .

Figure 31: Winnipeg . Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Influence of other markets: Like Calgary. Since then. On an ex-tax basis. like most markets of this population density.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. this market has exhibited relatively stable pricing.06 ¢ 0. and therefore experiences no particular influences from any other major market. though somewhat higher than average ex-tax pump prices. this market is removed from other significant markets.265. Consolidated net revenue: No ancillary or outlet cost data was available for this market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price .790 17 261 4.217 litres 8. This may reflect a lower than average Consolidated Net Income. it is an established rack price point.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .22 ¢ 7.Winnipeg population # of brands # of outlets outlets per 10. Price history / Taxation: In the early 1990’s this market experienced some price war activity. probably related to a regional surplus of wholesale inventory (see Regina).ex tax Canada Average . although there is no study data to support this. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. possibly due to modest ancillary revenue.000 616. and has remained very close to the Canadian 10-city average. although. prices have tended to stay somewhat above the Canadian average.

as Figure 24 shows. it is likely that low operating costs.Nanton.000 1. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. although not as low as expected. Average outlet throughputs were relatively low. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.the highest of the entire group . while others experience consistently high prices. Nanton had the second lowest gross product margin of the study group.600.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. the retail gasoline market in Nanton was not restricted to the local population. in order to maintain a share of the considerable potential sales revenue that passes through this market. due to its proximity to one. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. a feature not available to other. placing Nanton well below the expected margin. While these conditions would normally result in a high gross product margin.585 4 5 31. would have an offsetting effect. this market has a relatively low freight overhead. Influence of other markets:. the Nanton retail gasoline market displayed the same price attributes as a major urban market.000 litres 5. Alberta population # of brands # of outlets outlets per 10. Nanton was the smallest market in terms of population.071. Unlike many of the smaller markets in this study group.91 ¢ 0.far in excess of what would be expected of a community with a population of 1. MJ ERVIN & ASSOCIATES 59 . more isolated small-town markets. and perhaps healthy ancillary sales associated with highway traffic.41 ¢ 5. in terms of expected petroleum revenues. Nanton appeared to benchmark its pump prices to those of Calgary. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Nanton has traditionally priced either at or below Calgary. Nanton had a high number of per capita outlets .and a low average outlet throughput. Due to its highway location and its proximity to Calgary. Consolidated net revenue: No Ancillary or cost data was available. Despite its small size. Nanton was perhaps the least viable market in the study group.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Price history / Taxation: In order to attract market share beyond simply the local population. In this respect. situated on a major North-South highway to the United States Among the study group. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices.

Geographic / Supply / Freight cost considerations: At 1.623 litres 12.000 6. Peace River also experiences high freight costs. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. Supply is via tanker truck from Edmonton.6 cents per litre. and due to its isolated locale in northern Alberta. they were comparable to other markets with similar average throughputs. MJ ERVIN & ASSOCIATES 60 . isolated markets.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.45 ¢ 1.Peace River.157. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. its normal rack point. high pump prices. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. though fairly typical of many smaller. experiencing relatively high gross product margin and consequently. nor is it influenced by. other markets.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. Peace River has among the highest freight cost in the study group.715 6 8 11. and in fact fell into a tight cluster of four other study markets. further adding to overall high pump prices. Alberta population # of brands # of outlets outlets per 10. isolated markets. Price history / Taxation: Peace River is typical of small.6 ¢ 10. and was accordingly chosen as a study market. In contrast to Nanton. this market has little or no influence upon.

Geographic / Supply / Freight cost considerations: At 3. thereby creating the potential for narrower margins.02 cents per litre. the community of Thompson clearly falls into the category of a small. nor is it influenced by.Thompson. It also experienced high freight costs. Thompson is among the highest freight costs in the study group. Consolidated net revenue: Low outlet throughputs were offset by higher margins. Influence of other markets: Since is not located on a major inter-uban thoroughfare. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Other considerations: Like other small markets. This however.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. resulting in per-outlet petroleum revenues which were quite typical of many markets. this market has little or no influence upon. isolated markets. Price history / Taxation: Thompson was typical of small.975 5 6 4. a significant portion of which would likely be distributed towards supplier overhead costs. they were comparable to other markets with similar average throughputs. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. and reduced pump prices. These factors resulted in relatively strong per-outlet net revenues. Although outlets in Thompson appear to be as competitive as those of any other study market. further adding to overall high pump prices. other markets.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.1 ¢ 3. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. Although ancillary revenues were the smallest of the study group.014. and due to its isolated locale in northern Manitoba. and in fact fell into a tight cluster of four other study markets. MJ ERVIN & ASSOCIATES 61 .520 litres 14. Supply is via tanker truck from Winnipeg. remote market. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. experiencing relatively high gross product margin and consequently. high pump prices. its usual rack point. Thompson is faced with the dilemma. Manitoba population # of brands # of outlets outlets per 10.02 ¢ 11. outlet costs were also modest typical of most smaller markets.000 14.

Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . Within this region are thousands of retail outlets. it had the second highest brand variety of the study group. stretching from Pickering to Buffalo. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. similar to that of Montreal. Figure 32: Toronto .06 cents per litre. as evidenced by an exceptionally low gross product margin.775 30 546 2. and a resultant low consolidated net revenue. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. This is likely offset by high operating costs. In addition. On an ex-tax basis however. and is also relatively close to wholesale supply sources in the US.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. least number of outlets per capita.3 ¢ 3. New York.478 litres 3. it is likely that outlet ancillary revenues are among the highest in the country.36 ¢ 0.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.098. this market was consistently less than the 10-city average. Consolidated net revenue: Although no study data was available for this market.extax Toronto Posted Price . and first in average throughput per outlet.Toronto population # of brands # of outlets outlets per 10. Influence of other markets: This market is continuously linked with several other major retail markets.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.275.000 2. thus there exists a climate of robust competition. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. this market ranked first in a number of measures: lowest gross product margin. With an average “blended” gross product margin of only 3. It consequently has a low freight component.

Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . slightly lower that expected.000 678.948 litres 5. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. Although petroleum revenues were typical of major markets. and close to the Canadian 10-city average. and operating costs were higher than most. some of which have on occasion priced below Ottawa (see Nanton and Calgary).ex tax Canada Average . in fact.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. ancillary revenue was slightly lower than average.29 ¢ 5. Other considerations: While pump prices in this market were somewhat higher than in Toronto.Ottawa population # of brands # of outlets outlets per 10. freight costs within this market were quite low. Influence of other markets: Although Ottawa is the only major market in the immediate area. rural markets co-exist in this area. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.004. Figure 33: Ottawa . Consolidated net revenue: was low. exhibiting all of the characteristics of robust competition. several smaller.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.97 ¢ 0.145 19 209 3. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.

yet with some potential for cross-border retail competition. Pump prices in this market were thus typical of any market with similar throughput characteristics. Freight costs are therefore high. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). a consequence of the transport distance from the rack point.000 81.465. somewhat isolated.73 ¢ 1.Sault Ste Marie population # of brands # of outlets outlets per 10. Influence of other markets: This market is close to a US border market. Sault Ste Marie is a sizable market.475 10 24 2. a product of relatively strong net petroleum revenues combined with lower than average operating costs. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. MJ ERVIN & ASSOCIATES 64 . partly due to higher freight costs. average throughputs were modest. This would suggest that a significant market share is being lost across the US border. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.550 litres 8. and between 5 to 8 cent per litre in gross product margin. this Canadian market has some difficulty in remaining both competitive and viable.22 ¢ 7. and accordingly. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.

was much less than expected for a market of this size. in fact the second highest in the study group. brands.000 3.006 litres in 1995. It therefore presents some unique characteristics for the market study. This is a major factor in the high cost of gasoline in this market. An average outlet in Sioux Lookout pumped only 694. Freight costs are therefore high. and had the least number of outlets. this market experiences a high degree of price competition. despite its high prices. and outlet throughputs of any market studied.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. although high. MJ ERVIN & ASSOCIATES 65 . with little or no influence from other retail gasoline markets. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck.310 3 3 9. This would suggest that.Sioux Lookout population # of brands # of outlets outlets per 10. so that virtually all sales volume represents local demand only. Sioux Lookout is well-removed from any major highway. Influence of other markets: This is clearly an isolated market.96 ¢ 3.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. largely due to higher freight costs.066 litres 14. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. Consolidated net revenue: No data was available for this market.2 ¢ 11. one-seventh the average throughput in Toronto.

On an ex-tax basis however.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.Montreal population # of brands # of outlets outlets per 10. This. this market ranks first of the study group in terms of brand variety. combined with low petroleum revenues and high operating costs. Figure 34: Montreal . Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. pump prices in Montreal have generally been at or below the 10-city average for major markets.775.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . With 32 competing brands.5 cents per litre was introduced into the Montreal area). Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. with resultant low average outlet throughputs. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. Influence of other markets: Like Toronto. Montreal was included in the selected market study. It therefore represents a highly competitive rack market. placed Montreal lowest of all study markets in terms of consolidated net revenue. a function of a competitive rack market and an excess of retail outlets competing for market share.870 32 866 4.000 1.extax Montreal Posted Price . pump prices in this market have a tendency to be volatile. Price history / Taxation: As the figure shows. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.43 ¢ 0. thus promoting a competitive climate. an additional tax of 1.394.3 ¢ 5. this market interacts with several other markets in the region.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.144 litres 5. and is also relatively close to wholesale supply sources in the US.

MJ ERVIN & ASSOCIATES 67 . Nevertheless. within a cluster of other markets with similar attributes. yet is geographically quite isolated.08 ¢ 11.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.75 cents per litre.289 litres 12. were quite typical of markets with similar populations. by tank truck. but is quite isolated from any other markets. but as the figure shows. Chicoutimi is normally supplied from the Quebec city rack. both pump and ex-tax prices in this market were higher than average. although low.Chicoutimi population # of brands # of outlets outlets per 10.000 120. Consolidated net revenue: was average among the study group. Margin/Throughput relationship (Figure 24): Outlet throughputs.605 14 97 8.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. a partial factor in the high cost of gasoline in this market.250. In the case of Chicoutimi. this market has little potential as a rack market. for example). Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. Freight costs are therefore somewhat high.28 ¢ 1. Gross product margin was accordingly high. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. this amounted to a reduction of 5. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.

Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Although operating costs are likely to be low in a small market like Gaspé.33 ¢ 14. with little or no influence from other retail gasoline markets. Influence of other markets: This is clearly an isolated market. so that virtually all sales volume represents local demand only.50 ¢ 3. by tank truck. amounting to a reduction of 5. both pump and extax prices in this market were higher than average. ancillary revenues would likely be modest.Gaspé population # of brands # of outlets outlets per 10. MJ ERVIN & ASSOCIATES 68 . a key factor contributing to its 14. in fact the highest in the study group. in the case.400 6 13 4.17 gross product margin the highest of the study group. Nevertheless. Consolidated net revenue: No data was available for this market. this margin was only slightly higher than expected for a market with these throughput attributes. Freight costs are therefore high. This is a major factor in the high cost of gasoline in this market. Nevertheless. a product of high freight costs and gross product margins. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group.900 litres 17.75 cents per litre.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. Gaspé is well-removed from any major highway.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.000 16. located at a considerable distance from its rack source of supply.

resulting in lower than expected average outlet throughputs.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. and therefore. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. Price history / Taxation: Historically. In fact. ex-tax prices were relatively high. posted pump prices in the Saint John market have closely followed the 10-city average.79 ¢ 0. Figure 35: Saint John NB . do not differ markedly from any other rack point in the study group. Consolidated net revenue: was average for the study group.095. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada.27 ¢ 9. Saint John presents some unique characteristics for the market study. That a major refinery resides in this market might suggest that these prices should be among the least in the country.694 litres 9.000 74. this market fell within the expected range of gross product margins as a function of outlet throughput.Saint John NB population # of brands # of outlets outlets per 10.extax MJ ERVIN & ASSOCIATES 69 . which for Saint John. reflected in the high ex-tax pump price. it is an established rack point.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Average gross product margin was consequently high. and is capable of shipping and receiving wholesale product through marine facilities. with or without a local refinery. Since provincial taxes are among the lowest in the country.970 9 56 7. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Nevertheless. Accordingly. retail pump prices are ultimately a reflection of rack prices.ex tax Canada Average . freight costs in this market are low. the Saint John retail market is relatively isolated from other retail markets of any significance.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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.............. 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences................ 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.................. ............ after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements................................ 71 MJ ERVIN & ASSOCIATES 73 ....... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads... 50 Finding 20: For the 481 individual outlets studied........................................... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre............... . 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.................. reduced pump prices.......... remote population centres.......................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied............. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre...................... which ensures a competitive product price for buyer and seller alike...................... when compared on an ex-tax basis. while those with high Gross Product Margins tend to have low outlet throughputs....................................... residuals for outlets not studied may be better...... .....Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products... ....... particularly in comparisons of major urban markets to small.51 Finding 21: Based on published rack prices and the individual outlet data.......................... which in turn.. .... ............................................ 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. the residual represented a net loss to the supplier..... the profitability of the 481 outlets studied appears only marginal.................... these ancillary operations contributed to a lower product margin and consequently.. a feature of most market-regulated commerce...................... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness.......... The viability of the Canadian retail gasoline sector as a whole may be somewhat better................................ are principally a reflection of changes in the underlying price of crude oil......................................................................... and likely a negative impact on consumers........................... In effect.. 33 Finding 13: From 1991 to 1996.... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes............... given the possibility of discounts from posted rack prices and potentially lower overhead costs...................... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences................ 48 Finding 19: Based on published rack prices.

a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. each with unique dynamics. was shown to be strongly competitive: • A long-term decline in pump prices. The Canadian retail petroleum products industry. Virtually all of the competitiveness indicators examined in this study relate to price. place. and promotions are the other three). Canadian prices have been at or below US prices in recent years. On a national level. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . is mistaken. This has not simply been a result of a decline in underlying raw materials costs. Rack and pump prices are determined in competitive marketplaces. The resultant margins. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. price is but one of four competitiveness “tools” available to marketers (product. over the long term. 1. Although an objective measure of competitiveness is elusive. As described in this study however. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model. was observed (Finding 10). when taxes were excluded (Finding 14). This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). exhibited a diminishing trend (Finding 13). by all objective measures available to this study. the very margins within which this industry operates has. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). in comparing Canada average (city) pump prices to those of the United States. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. In comparing several diverse markets.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. 2. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. when measured in constant and nominal dollars.

while crude oil markets are considered global in scope and rack product markets are considered regional in scope. By contrast. Petroleum product taxes are levied at the federal. when the “outside” factors (tax. The demonstrated exception to this is in markets directly adjacent to nearby US markets. rack price and freight cost. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and accordingly. Taxation is a significant factor in the price of retail gasoline. but given its magnitude. presents a competitive disadvantage to Canadian marketers. While some markets. experienced higher than average pump prices. or even between Canadian markets with differing tax structures. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). retail petroleum markets are considered local (municipal) in scope. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. Dealers were shown to have a variety of relationships with their supplier. well over half of all outlets in Canada operate as lessees or independents. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). it is important to understand that. are thus a reflection of the state of product supply. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. for example) were rationalized. Due to the localized nature of competition in the retail gasoline marketing sector.even negative values. crude costs accounted for roughly 34 percent (Finding 2). the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. and in some markets. generally do not serve as competitiveness inhibitors. these markets have managed to sustain a certain level of viability and competitiveness. municipal levels of government.5 cents. or 6 percent (Finding 6) of the 1996 average regular pump price. measured against the average outlet throughput for that market. taxation as an element of public policy is an area worthy of additional research. demand and other competitive factors existing at the time. MJ ERVIN & ASSOCIATES 75 . refiner margins accounted for 5. an exercise that consumers are unlikely to engage in. This would entail the tracking of not only pump price. In applying such a model to the retail petroleum marketing industry. and product margins accounted for 3. but also rack prices and outlet performance. The latter two can vary considerably from one market to another. and in some markets. but even in such cases. This implies that the competitive dynamics pertaining to these retail markets can. provincial. 3. and do.3 cents or 9 percent (Finding 5). and are a predominant cause of inter-regional pump price differences (Finding 16). taxation differences between Canadian and US markets. since this is the effective range of consumer choice. particularly smaller ones. vary considerably from one population centre to another.

5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). predictable seasonal pattern. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. While price wars are undoubtedly an indicator of competitiveness. when distributed these three ways (Finding 20). supplier costs and profitability. constitute a small portion of the retail pump price. MJ ERVIN & ASSOCIATES 76 . Sioux Lookout. The pump price/margin model shows that in 1996. reflecting consumer demand behavior (Finding 15). dealer income. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. Viewed from this perspective. Demand for gasoline was shown to vary significantly according to the time of year. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Retail pump prices showed a corresponding seasonal pattern. on a per litre basis. exhibited competitive traits typical of any of the study markets. 4. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). which represent the majority of Canada’s population base. a price-stable market. when examined on the margin-volume model. Retail gasoline marketing revenues. and more price-stable markets such as Sioux Lookout. Pump price fluctuations can be an indicator of competition in the marketplace. Retail pump price changes showed a close relationship to underlying rack prices. In fact. Rack prices were shown to not significantly differ between major centres. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. the Canadian retail marketing sector realized an average gross margin of 3. 5. and a loss in the case of urban markets. which in turn is the principal driver of ex-tax pump prices. which in turn.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. showed a close relationship to underlying crude prices (Finding 11). This margin represents gross revenue (after wholesale product and freight cost) which. This consolidated outlet revenue. fluctuating prices are a strong competitiveness indicator (Finding 7). the absence of price war activity does not imply a lack of competitiveness. in a highly distinct. on the basis of price fluctuation alone. is available to provide for all retail marketing operations including outlet costs. second only to the United States. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. incorporated with ancillary revenues and outlet costs.

and in turn.6. Thus. and have resulted from. if Canadian average pump prices were only one cent higher than they were in 1995. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. assuming all other costs were unchanged. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. despite the predisposition of many observers to use them as such. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). MJ ERVIN & ASSOCIATES 77 . Indeed. not excessive profits. Both the downward trend in margins. Also. crude costs. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. While these economics might appear to place this industry in a position of poor viability. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Thus. including: • • • improving production efficiency through refinery plant rationalizations (closures). 7. Also. these findings clearly show that pump price increases are ultimately linked not to increased profits. and the associated industry initiatives which are ongoing in nature. several competitive strategies. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. but to increases in underlying rack prices. and has been a result of. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. and the marketing sector in particular. both of which are beyond the direct influence of Canada’s oil companies. based upon an assumed posted rack price. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. despite increases in tax content and crude costs (Finding 12). Industry profitability is extremely sensitive to very small changes in pump price. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Declining refiner and marketing margins. Since 1991. This trend has both resulted in. Nevertheless. in the long term these fluctuations are likely more reflective of market restorations. intense competitive pressures in the downstream industry in general. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. have caused. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. not price. this industry sector would have realized profits of unprecedented proportions.

although this study provides comprehensive evidence of this. Although some smaller markets appeared to have higher gross product margins than larger markets. Smaller. While competitiveness in most smaller markets was shown to be as active as in larger centres. isolated markets face particular challenges: although found to be highly competitive. Outlet throughput is a key determinant of inter-market pump price differences. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. When plotted against the margin-volume model. virtually all of the 19 study markets exhibited similar levels of competition. Thus. This created some economic pressure to sell product at a higher pump price. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). regardless of size. poor outlet throughputs were generally the predominant factor. other factors exist which contribute to relatively high margins and prices.5 million fewer litres of gasoline than a group A (major centre) station. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. average pump prices were relatively high. more isolated markets are generally higher than in larger centres. most markets. A wide range of petroleum gross product margins were evident within the 19market study group. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. thereby improving petroleum volumes and ancillary revenues at the remaining sites. • • At first glance. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. When these margins were compared to their corresponding outlet throughputs. had petroleum margins which were commensurate with average outlet throughput for that market. the solution would be to encourage some dealers to exit the market. MJ ERVIN & ASSOCIATES 78 . and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). it would seem that if local government in smaller markets were interested in lowering pump prices. reducing the number of outlets may also reduce the number of competitors. The costs of most consumer goods in smaller.8. 9. according to the margin-volume model. reduce pump prices. and this study showed that gasoline prices were no exception. That such a relationship should exist was not surprising. there are three points to consider: • In very small markets. which could actually inhibit competition. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. In suggesting this approach however. which should.

Convenience store. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. has seen a decline in pump prices relative to other Canadian markets. depressed petroleum revenues below that of outlet operating costs. and the perceived effect on their markets. the degree of price competition in the retail petroleum has in effect. The historical record is clear however: since deregulating pump prices. 10. characterized by narrow product margins and relatively flat pump prices. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues.• A full-serve retail gasoline outlet typically employs 3-5 staff. This competition then. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). MJ ERVIN & ASSOCIATES 79 . As these findings show. is well beyond the scope of this study. under the current PEI regulatory structure. Retail ancillary operations are a critical element of petroleum price competition. Also. the Halifax market. many national and local environmental regulations exist for good cause. car wash. is both the cause and consequence of increased activity in ancillary operations. 11. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). in order to build upon the findings in this study towards a full understanding of the dynamics at work. is viewed as an agency which exists to the benefit of industry and consumer alike. and as such. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. as marketers find even more innovative ways to attract market share. and in turn. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. are an acceptable limitation on pure competition (Finding 8). The loss of employment represented by a station closure may be of some concern to smaller communities. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and the traditional automotive service bay. and likely others in Nova Scotia. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. does not appear to benefit in consumer terms. Charlottetown. will likely preserve a highly competitive petroleum market. The federal Competition Bureau for example.

This should be in the form of a quarterly summary of price trends and related measurements. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. A regular comprehensive competitiveness evaluation. Develop cooperative industry research into marketing sector competitiveness issues. possibly to the detriment of the consumer. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. and the nature of competitiveness influences. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. 1. Improve public understanding and awareness of competition in the petroleum marketing sector. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 .This study proposes rather. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. direct regulatory interventions may have an adverse effect on competitiveness. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. petroleum marketing competitiveness. as it does in the Canadian petroleum marketing sector. not inhibit. Public perception measurement. 2. and the converse image held in much of the public domain. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. margins and competitiveness factors. that where a healthy competitive climate exists. in a simple format designed for consumers and legislators.

• • • • * * * Better understanding of this industry. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. and regulators alike. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. consumers. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. and issues/opportunities facing such markets. along the lines of the model used in this study. using Canadian and foreign selected markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. MJ ERVIN & ASSOCIATES 81 . Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and in particular.

Appendices MJ ERVIN & ASSOCIATES 82 .

Ex-tax Pump Price . and in some regions. and therefore purchases its supply of petroleum product from an outside source. diesel. such as convenience goods.a generic term referring to a retail outlet operator.. Usually expressed on a per-unit basis. Distribution Costs . Dealer . Excise Tax . such as lessees.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived.a petroleum marketer who is not involved in the refining of petroleum products. which serves as the voice of the petroleum products industry in Canada on environment. There are several modes (see below) of dealer operation.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. currently established at 10¢ per litre. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. Independent Petroleum Marketer . Marketer . but inclusive of any corporate taxes on earnings.I Glossary of Terms Ancillary service . The ex-tax pump price is exclusive of these taxes. CPPI . the regular unleaded pump price. Downstream . Integrated Oil Company . and included in the retail pump price. Major Oil Company . an association of petroleum refiners and marketers. such as a retail gasoline outlet..the retail price of gasoline that would be displayed if all product taxes were removed.Canadian Petroleum Products Institute. municipal tax levees. and commission dealers. Grade Differential . safety and business issues. Lessee .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. of transporting petroleum product from the rack point to the final point of sale. in cents per litre.a service provided in addition to the basic retail petroleum sales operation.an organization who sells refined petroleum products to end-use consumers. service bays.(for the purpose of this study) the cost.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. etc.the difference in pump price between a premium or mid-grade of gasoline vs. etc. health. MJ ERVIN & ASSOCIATES 83 .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. such as a major oil company or regional refiner/marketer. independent dealers. lubricants. GST. provincial pump tax. These product taxes include Excise tax. generally expressed in cents per litre. Margin . car wash. for example.

or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. it is usually based on the market-driven rack price. MJ ERVIN & ASSOCIATES 84 . an association of upstream and downstream oil companies and related organizations.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. and independent dealer. Supplier . Rack Point . usually per month or per year. the supplier has initial title to the petroleum product as it leaves the rack point.an organization who.within the context of retail gasoline marketing.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.Petroleum Communication Foundation. This may be at a refinery loading terminal. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. Transfer Price . Refiner . lessee. Upstream .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products.the type of contractual relationship between the supplier and the dealer (outlet operator).the point at which title to refined product is transferred from the refiner to the supplier. these can be broadly classified as company operated. Throughput . In the retail gasoline sector. Regional Refiner/Marketer . PCF .Mode . Rack Price .the wholesale price posted at the rack point. Although in theory the transfer price could be set at any arbitrary value. the raw material from which petroleum products are manufactured. commission dealer. manufactures (from crude oil) a range of petroleum products suitable for consumer use.the segment of the oil industry involved in the exploration and/or production of crude oil.

4 152.7 30.8 108. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.5 126.1 167.0 1991 126.4 122.1 1990 119.3 119. Nominal (¢/litre) (2) RUL Ex-tax Price.4 124. No.2 39.9 122.3 132.5 111.3 151.3 134.1 146.5 120.2 109.3 19.1 120.1 48.4 136.3 96.8 95.2 133.0 19.8 93.1 104.7 123.3 115.5 124.7 22.7 54.0 111.4 29.0 93.4 45.9 118. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.1 26.2 49.2 45.0 30. MJ ERVIN & ASSOCIATES 85 .9 1993 130.6 91.8 1987 104.7 95.7 132. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.2 31.3 58.3 125.0 1988 108.4 134.5 30.5 112.1 115.8 132.6 51.4 57.4 34.0 42.9 97.0 97.9 26.1 87.5 25.2 121.1 103.7 124.9 108.3 1992 128.1 104.3 52.2 112.1 151.3 160.8 94.2 20.0 104.4 110.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.1 117. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.2 45.4 27.6 136.0 32.1 120.1 117.0 93.3 27.2 99.1 97.5 49.4 104.8 104.8 47.3 141.9 26.2 127.7 118.2 142.1 144.3 40.1 126.6 133.8 106. Nominal (¢/litre) (2) RUL Annual Price.4 120.3 122.7 29.3 139.2 30.6 122.1 105.8 28.5 145.0 135.2 92.4 104.7 96.1 40.4 53.6 107.3 1989 114.5 115.9 155.7 122.3 55.8 135.0 102.5 94.9 115.0 115.8 130.5 100. 62-010: Consumer Prices and Price Indexes. using a weighted (by provincial gasoline demand) 10 city average.9 1995 133.2 50.4 97.9 1994 130.6 92.

7 18.6 54.3 24.8 15.8 11.7 19.5 22.9 4.2 7.9 22.4 32.1 16.1 22.9 26.6 24.8 24.2 26.5 26.5 28.2 41.0 16.2 27.3 6.8 53.1 25.9 23.8 26.7 13.1 16.6 8.2 15.4 24.2 4.3 4.3 15.6 9.4 9.3 13.2 21.7 33.9 55.8 14.5 7.9 56.2 7.9 15.4 26.4 33.8 53.4 14.6 20.6 26.2 5.4 14.9 21.3 14.2 26.7 63.6 26.2 13.8 9.8 28.5 23.1 16.7 32.3 22.0 24.7 15.5 57.8 21.7 23.2 23.8 33.6 54.5 35.0 24.9 25.6 25.9 53.7 25.9 7.2 22.3 22.9 55.7 14.0 26.5 10.5 14.2 25.0 24.8 14.5 56.3 42.2 23.3 6.1 5.3 56.9 7.0 55.8 13.9 26.1 29.0 24.7 29.5 7.4 8.8 55.9 14.7 14.5 26.0 52.3 54.3 13.5 10.4 57.0 7.8 22.0 20.3 58.8 14.5 23.3 56.7 14.9 6.8 8.5 16.8 14.0 25.2 13.8 16.0 16.3 15.5 33.2 8.3 Tax Content 23.0 16.7 4.7 8.2 27.4 55.6 52.8 8.4 13.8 30.3 13.4 58.7 7.5 15.4 14.5 Gross Marketing Margin Gross Refiner Margin 53.8 25.0 5.0 24.7 7.7 4.8 23.3 25.5 54.7 6.7 14.1 18.2 7.1 18.4 20.0 26.2 11.2 24.6 13.1 21.7 4.7 28.9 56.1 7.2 13.7 7.1 7.9 11.0 16.2 13.3 54.4 15.0 15.9 25.6 54.0 28.8 29.9 7.5 8.0 8.1 23.2 16.0 9.7 29.9 13.1 9.4 31.1 13.5 27.6 18.3 54.9 25.2 29.4 26.5 11.1 17.1 52.6 6.5 23.7 39.9 23.2 65.8 26.0 33.9 24.0 13.3 23.9 14.9 17.4 31.9 53.2 56.9 6.9 9.7 31.9 4.4 24.6 13.2 27.1 39.4 12.3 26.7 14.5 5.2 14.9 30.2 7.4 56.9 6.7 12.6 7.Table B: Key Price / Margin History .1 24.3 12.9 54.0 54.0 25.2 6.0 14.9 8.7 19.5 32.7 58.0 4.3 5.1 53.0 7.1 23.3 13.0 24.2 6.0 26.8 23.7 Downstream Margin 14.1 22.3 26.1 19.9 58.1 13.6 4.9 23.4 13.1 23.3 57.8 21.6 21.3 9.2 12.5 30.4 7.3 13.5 14.9 12.4 21.5 25.0 7.4 14.6 26.0 24.1 13.9 25.2 16.4 22.4 30.4 29.4 MJ ERVIN & ASSOCIATES 86 .7 29.7 34.2 14.9 25.8 55.0 22.9 31.6 23.4 34.5 31.7 18.7 24.1 16.4 53.0 10.5 19.6 23.0 12.6 5.6 25.5 6.6 28.3 17.5 27.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.8 57.4 26.2 25.1 53.2 63.3 66.

7 23.5 11.1 14.2 25.6 3.5 7.3 26.5 53.4 24.5 54.6 10.6 20.2 27.9 4.1 6.2 14.6 15.9 29.2 7.1 51.1 6.3 8.3 12.2 26.7 52.3 26.0 27.9 28.3 13.5 25.4 11.2 4.2 20.3 6.7 25.4 6.7 7.1 15.7 18.8 27.7 53.5 2.5 11.3 4.3 28.6 15.2 26.7 29.7 25.6 16.9 12.6 53.3 26.4 6.5 20.1 26.7 13.4 28.7 53.2 5.3 21.4 25.0 26.0 11.7 5.0 26.0 28.9 58.1 14.3 7.6 9.4 26.0 28.9 14.7 8.4 25.8 50.1 24.9 6.7 51.2 25.0 25.1 6.3 26.9 4.4 5.4 26.5 5.5 19.5 9.0 6.0 9.6 21.5 3.4 21.4 21.8 28.4 13.6 27.6 17.5 13.3 28.5 3.5 5.9 Downstream Margin 12.5 28.8 49.1 Gross Refiner Margin 7.2 15.4 6.9 29.8 23.1 51.7 53.3 4.5 21.9 19.6 10.1 55.2 23.3 7.5 23.5 6.0 6.1 11.7 3.2 12.1 Tax Content 26.6 20.8 20.1 10.7 6.4 26.3 21.1 61.3 53.6 23.2 49.6 4.6 53.7 14.2 14.4 32.6 19.5 6.3 4.0 14.2 11.1 6.6 11.0 5.0 12.7 13.9 26.1 16.8 25.1 57.9 49.5 21.3 26.5 15.0 6.0 9.0 14.9 27.4 51.7 3.1 11.9 49.4 16.8 22.2 28.8 28.2 7.9 14.3 9.2 9.1 14.3 9.0 5.9 9.4 7.0 57.2 14.7 26.4 15.0 24.2 26.7 16.0 28.3 55.5 4.7 12.0 12.1 15.0 28.3 9.1 26.3 54.1 15.9 5.8 6.9 17.3 58.0 28.8 29.7 6.7 24.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.3 26.7 7.5 19.3 25.5 17.3 23.6 12.2 20.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .3 27.1 54.7 14.5 13.2 54.1 3.9 12.2 7.3 26.3 26.7 26.5 6.6 4.5 21.0 54.8 4.8 23.0 52.0 53.7 24.8 10.5 55.4 6.9 27.1 26.7 5.5 7.6 5.1 21.3 26.4 26.0 25.8 52.8 17.9 11.7 15.4 4.9 23.1 11.9 3.0 29.5 14.2 Gross Marketing Margin 4.1 20.2 4.1 11.2 7.

075.876.281 2.301.765 3.218.475 2.7 34.1 23.324 2.461 3.476.102.510 3.430.822.827 3.287 2.804 3.047 2.073 2.897 3.8 21.869 2.703 2.710.202 3.294.316.192.301 2.279 2.179 3.958.798.799.335 2.3 23.673 2.130 3.370 2.297 2.477.298 2.970 3.206.1 22.930.003.1 29.813 2.235 3.2 27.369 2.589 3.938.181.2 23.176 2.269 2.499 2.283.422.580 3.501.019.409.250.941 2.403 2.781.9 30.101 2.8 26.998.262.7 29.047 3.089.970.9 26.450 2.767.2 22.462.743 2.429 2.457 2.3 24.254.661 Canadian Domestic Gasoline Sales (M3) 2.773.894.114 3.9 19.026 2.366 2.739.322 2.246 2.897.2 27.651 2.311 3.321.299 2.295.325 2.9 29.626.1 16.097 2.979 2.291.191 2.873.621.1 23.647.628 3.930 3.232 3.180 2.6 23.9 17.193 3.5 28.802 2.301.354.151.218 3.633 2.6 21.300.3 22.101.5 22.878 2.193 3.516.564 2.485 2.636.4 31.646 2.286.7 24.331 2.4 24.5 30.152 2.299.469 4.002.871 2.779 2.437.9 23.661 Canada Avg ex tax RUL pump price (¢/l) 39.381 2.619 2.874 3.844.220.565.011 2.8 28.615 2.2 24.725.823.714.473.508.6 28.7 21.9 23.8 22.035 2.2 26.133 3.429 2.389.572 2.880 Canadian Retail Gasoline Sales (M3) 2.0 24.140.627 2.952.592 2. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.864 2.654.168 2.934.015 3.966.693 3.733 2.182 3.2 26.622.020 2.8 29.671.322 2.672.415 2.8 MJ ERVIN & ASSOCIATES 88 .883.830.889 3.254.8 27.045 2.801.865.625 2.039.893.443 2.884 2.4 29.255 3.067.785.837.161.667 2.677 3.720 3.6 26.566.142.967 2.7 29.859 2.7 26.176 3.7 29.609.4 25.479 2.900.441.242 2.141 3.973.199 2.209.4 24.775.2 23.744.4 32.796.637 3.8 23.427.897 2.3 26.095 2.599 2.285 2.498.767.070.886 3.969 2.521 2.9 22.2 29.029 2.027 2.377.254 2.4 22.682 3.5 27. Inventory.455.748.709 2.904.748 2.752 2.933 3.345.1 23.5 31.931 3.270 3.532.502 2.518.810.5 27.5 23.083.188 3.416 2.379.322 3.558.202.268 2.716.890.0 20.9 21.630.412 2.369.709 2.633.968 3.641.840.9 26.439.346.887.132.4 21.338 3.256 2.831.180.2 21.108.037 2.378.544 3.2 27.245.287 2.587.509 3.600.669.9 23.801.853.853 3.025.7 28.5 32.976.782 3.8 23.732.180 3.201.000 3.326.456 2. Demand.6 24.070 3.030.818.5 25.141.122.437.932 2.1 21.287.636.411.113.251.044 2.995.620 3.3 Canada Avg RUL Rack Price (¢/l) 35.2 27.684 2.642.130 3.839 2.085.490 3.480.4 21.051 3.960.804 2.281.373.095.935 3.729.045.458.263.3 23.7 31.833 2.0 28.979 3.160 3.8 33.5 19.735.112 2.644 3.7 24.045 2.604 2.853 2.323 3.612 3.131.771 3.3 22.9 31.164.558.329 3.081.Table C: Canadian Supply.056 3.688.808.313 2.687.2 20.682.8 30.841 2.141.333.970.022.666.361.843.613 3.122 2.315 2.120.7 18.

4 25.9 22.984 3.675 2.648 3.426.386 3.469.977.9 29.0 26.889.055 2.7 22.264 2.671.649.1 24.155 2.336.936 3.048.6 20.940 2.566 3.112 3.0 26.219 Canada Avg ex tax RUL pump price (¢/l) 27.5 21.806.0 24.324.2 25.669 2.597 2.261.857.195.320 3.606.881.840 2.294 3.791 3.4 26.930.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.6 20.717.2 25.467 2.797.214 2.205 2.614.965.997 2.324 2.539.082.5 21.382.692.390.593.799 2.198.165.170 3.970.074.346 2.264 2.0 25.006 3.222 2.904.130 3.961.785.244 3.703 3.649.864 2.170 Canadian Retail Gasoline Sales (M3) 2.414 3.8 25.182.148.0 25.386 3.250.8 28.7 19.198 2.607.7 Canada Avg RUL Rack Price (¢/l) 20.656 3.830 3.871 3.601 3.097.667 Canadian Domestic Gasoline Sales (M3) 3.179.363.149.555.825.644 3.714 2.5 25.620.617 2.863.483.516 3.7 21.1 21.037 3.521 2.068.796.2 26.658.204.198.638 2.376.344 3.994 3.442 2.505 2.315.184.753 3.906.660 3.8 21.8 24.8 20.480 2.537.679.773.123.4 20.519.141 2. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 . demand.077.338 2.370.317 2.928 3.986.999 3.415 2.5 source: Statistics Canada (production.919 2.005 2.4 26.9 27.

0 44.1 52.9 56.5 52.9 53.8 57.2 65.3 50.5 56.5 59.9 53.1 55.6 47.7 46.5 57.3 52.9 54.9 51.2 46.9 52.7 65.9 62.5 57.1 49.2 50.6 62.2 50.4 59.3 52.6 56.8 48.9 52.8 45.8 48.5 57.3 55.9 53.9 MJ ERVIN & ASSOCIATES 90 .7 51.5 57.9 47.7 53.4 46.4 52.4 46.7 54.9 59.3 59.4 50.4 56.5 45.4 49.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.2 46.9 59.5 53.6 47.9 51.5 51.5 49.5 61.5 53.0 46.5 56.0 62.0 61.5 59.8 48.9 53.7 51.6 55.7 52.7 65.2 62.1 50.5 58.3 55.5 51.7 65.3 51.7 52.9 52.4 58.7 50.9 55.9 61.9 52.7 62.4 56.5 62.1 49.4 47.8 56.4 57.0 54.5 58.6 59.4 53.6 46.7 49.1 49.7 63.2 56.6 47.8 41.9 63.9 58.5 46.2 62.8 50.9 52.7 62.4 55.3 49.9 64.9 58.5 57.2 65.6 53.8 56.5 58.2 62.7 45.1 60.3 62.5 57.2 48.9 49.5 56.6 48.5 47.9 64.1 55.5 58.2 Nanton Peace River Regina 49.9 56.5 51.6 54.3 52.4 61.8 53.5 54.4 52.5 59.9 61.8 44.9 56.4 52.9 45.8 47.5 59.5 58.4 55.0 39.2 55.7 54.9 53.5 60.8 52.8 56.5 58.5 58.8 53.9 57.4 55.5 57.5 60.5 56.4 46.8 64.9 52.7 57.4 56.2 61.9 46.7 65.6 54.9 53.6 52.5 50.6 55.5 56.3 54.7 51.8 48.0 62.0 61.7 44.5 51.4 48.9 58.5 54.5 59.6 58.0 59.9 61.9 56.0 58.9 55.9 55.3 50.9 49.2 46.1 41.7 48.7 54.9 62.0 52.5 58.1 44.9 53.5 59.5 58.4 63.8 59.5 47.5 57.0 61.2 50.9 55.8 59.3 52.9 61.8 49.8 52.0 57.2 47.4 Winnipeg 49.8 56.5 59.2 62.9 61.5 57.7 48.6 46.5 53.5 55.4 55.7 45.5 55.9 64.8 51.3 48.4 54.9 57.0 62.4 52.8 55.9 54.5 47.8 52.9 54.8 53.6 50.4 54.8 56.9 47.5 57.9 58.1 44.4 53.2 58.8 54.3 56.2 62.2 54.0 61.8 47.5 60.2 62.0 48.7 White Rock Calgary 45.5 57.6 44.9 56.9 54.6 51.4 52.9 56.7 53.6 48.6 58.5 60.9 53.8 Thompson 59.6 50.9 54.3 42.4 55.5 57.9 54.2 51.9 52.9 54.6 49.5 57.9 53.0 61.8 57.9 61.5 Vancouver 53.5 60.3 52.5 58.9 54.1 53.0 52.6 53.7 50.9 47.1 56.9 56.2 51.2 62.3 48.7 65.3 61.9 47.1 55.2 54.9 56.0 61.2 51.4 56.4 53.9 58.8 52.5 51.0 55.8 50.1 50.9 44.2 59.4 56.2 62.4 57.2 54.6 48.9 64.9 51.5 58.5 60.9 48.9 56.5 58.7 57.9 64.4 61.0 61.1 52.Table D: Pump Price History .9 44.5 52.9 50.5 59.4 65.5 61.3 49.1 53.9 56.1 59.8 56.3 54.4 54.9 53.2 62.2 63.8 53.4 56.9 53.9 49.0 Sioux Lookout 62.5 59.8 52.2 43.5 45.4 58.0 59.9 56.1 43.9 51.0 50.4 61.4 55.7 53.2 57.

0 59.2 59.2 55.3 59.4 57.2 56.9 53.5 61.4 58.3 56.6 52.9 61.7 59.5 53.2 56.6 53.6 50.4 49.4 51.6 51.6 52.3 52.5 54.4 45.3 55.0 58.4 53.7 50.6 50.9 51.0 55.3 57.2 60.9 56.9 49.7 48.6 56.2 58.1 57.6 56.9 56.1 56.8 49.9 55.3 61.5 56.3 56.5 56.6 54.5 51.2 57.5 54.3 62.2 50.2 56.3 52.1 59.6 54.9 57.9 55.0 50.5 52.7 52.9 60.0 50.2 56.2 56.8 55.2 54.1 56.9 53.8 57.9 64.5 52.3 54.0 50.4 60.8 54.5 54.5 60.8 52.2 52.2 57.0 59.0 57.5 52.3 49.5 54.7 53.1 53.5 51.7 51.4 54.9 53.4 58.6 49.2 Montreal 63.2 57.5 63.7 56.6 51.5 55.2 61.0 61.8 55.6 58.9 55.6 59.5 55.9 55.8 57.2 55.3 59.0 48.3 54.8 60.1 55.8 56.5 61.2 57.0 60.4 55.6 52.9 55.7 59.1 53.3 54.3 53.4 57.3 54.1 57.8 55.0 52.8 55.2 53.3 53.7 52.2 53.2 60.1 55.6 50.5 53.5 56.6 52.0 56.7 54.0 53.9 58.5 57.6 57.0 54.9 50.8 49.4 55.9 49.3 52.6 63.0 60.1 48.9 64.5 59.2 49.0 49.9 56.6 55.4 57.5 59.2 49.5 51.0 51.0 51.4 52.6 58.7 58.6 51.3 55.2 59.5 54.9 49.4 51.1 54.6 54.6 55.2 58.0 54.9 60.0 47.5 61.0 55.9 61.7 57.1 55.8 50.8 59.7 58.0 55.5 53.8 50.7 57.8 61.7 51.6 53.7 49.1 58.8 52.7 53.2 51.1 51.4 53.6 55.4 50.2 54.7 52.9 64.7 56.4 54.9 61.0 59.6 52.7 57.0 52.6 55.4 58.0 53.3 56.7 56.9 57.5 48.3 51.1 58.1 49.7 51.6 55.2 57.5 64.0 56.2 55.4 53.3 56.9 54.4 53.8 54.1 54.6 58.5 60.0 53.8 60.4 54.3 53.5 57.5 57.9 55.7 56.3 55.2 54.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.9 55.5 53.5 51.6 63.1 61.5 59.0 47.1 55.6 56.1 61.2 52.6 55.2 51.3 55.9 49.8 53.1 58.4 52.9 53.3 54.3 54.0 52.5 54.7 57.7 54.9 63.4 54.0 61.3 59.4 57.3 53.2 57.5 57.8 51.8 53.9 56.3 55.5 64.9 55.9 53.2 53.2 Chicoutimi Gaspé Saint John 60.3 56.6 56.1 59.1 53.0 52.9 62.1 51.2 57.4 51.1 54.2 57.7 46.1 57.8 55.5 57.6 54.2 55.9 61.3 58.6 52.2 49.6 Canada Avg 55.8 55.8 63.3 60.3 54.4 58.8 61.9 58.2 57.1 53.8 54.0 57.6 61.1 Toronto 52.1 61.5 55.5 Ottawa 58.0 56.0 52.6 59.8 47.9 55.0 48.7 44.6 49.5 63.4 58.9 61.7 64.1 52.8 50.7 55.7 51.8 54.5 67.2 55.7 47.9 54.2 61.2 61.4 57.6 53.3 52.7 54.8 55.5 58.1 54.9 57.6 52.3 49.2 56.2 52.2 56.5 54.0 55.3 54.9 55.5 63.4 57.4 58.7 54.1 56.8 55.4 54.7 56.5 MJ ERVIN & ASSOCIATES 91 .3 59.8 53.9 54.6 55.6 63.2 56.1 51.1 53.4 54.0 52.6 54.2 58.7 60.6 59.1 60.5 56.3 54.9 52.2 49.4 54.2 57.9 60.7 56.2 51.0 57.6 60.1 55.0 60.1 60.2 54.5 56.1 52.6 53.6 54.3 55.7 57.8 56.2 55.9 57.8 57.1 55.1 52.2 54.6 58.3 53.7 54.6 58.0 54.4 54.8 Halifax Charlottetown 60.0 57.0 54.7 48.0 55.5 52.1 54.1 54.6 54.7 54.6 61.1 58.Table D: Pump Price History .0 55.0 60.

4 MJ ERVIN & ASSOCIATES 92 .8 21.2 29.5 24.4 31.2 22.9 24.4 28.0 23.4 31.4 31.5 29.0 Oct-93 28.3 24.0 25.1 31.9 21.3 May-94 28.8 27.5 24.1 24.8 Jan-94 25.6 23.1 25.5 27.9 Oct-94 32.4 29.0 23.6 29.9 28.3 30.3 27.3 29.6 26.7 Aug-92 24.6 22.8 28.3 29.6 May-95 29.3 26.6 Sep-93 28.8 31.7 28.6 27.4 22.8 Toronto extax 26.8 26.7 Mar-94 28.9 27.0 27.9 23.7 30.9 29.8 27.3 29.2 26.4 24.5 29.1 28.3 23.3 29.9 25.7 28.8 29.6 26.3 30.8 22.3 Jul-92 31.9 25.7 28.4 28.5 Oct-92 30.5 Sep-92 29.3 29.4 29.3 33.1 25.4 29.6 29.3 29.3 23.0 23.8 26.7 28.5 29.0 31.6 24.8 25.5 23.8 29.6 27.2 28.0 32.3 28.1 Apr-94 29.0 Jun-93 26.8 23.4 27.7 Sep-95 30.1 28.7 28.7 26.3 32.7 Sep-94 32.9 24.7 30.2 28.4 27.7 26.9 25.6 29.8 27.4 23.0 23.4 25.4 20.9 24.4 30.1 25.8 24.1 Mar-95 29.3 Jan-93 30.0 21.9 30.2 26.6 26.0 23.4 21.9 30.2 Jun-94 31.6 30.2 24.5 Jul-95 30.7 30.3 Feb-95 26.2 Nov-92 31.7 29.1 23.5 21.5 27.0 24.9 20.6 23.3 26.1 24.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.5 23.3 29.8 27.9 29.5 27.2 24.3 26.5 29.8 28.9 23.8 24.8 26.4 29.4 22.7 30.8 Dec-93 26.3 28.6 22.4 29.4 30.6 29.2 27.4 23.7 29.3 29.3 31.7 28.5 29.6 21.3 29.3 24.2 28.1 25.4 20.4 22.6 26.4 24.9 21.9 27.0 22.0 25.0 May-92 28.4 Jun-95 30.7 30.8 27.5 21.7 24.3 Dec-95 Edmonton Regina extax extax 27.9 28.5 25.2 Nov-94 29.2 Dec-94 26.4 27.4 30.2 26.1 30.4 29.9 28.2 23.8 25.8 27.2 Nov-93 27.0 May-93 29.4 25.2 28.9 25.4 31.0 27.9 26.7 26.4 31.4 Dec-92 31.8 29.0 29.4 25.3 26.3 24.0 25.1 30.6 23.7 Jan-92 31.7 27.1 Feb-93 29.6 25.9 26.6 30.3 30.3 29.6 23.7 29.6 Mar-93 28.9 27.4 20.1 20.9 31.2 24.8 26.4 Mar-92 28.0 26.8 28.1 22.7 27.7 Jan-95 27.2 25.1 22.6 24.9 Aug-93 30.1 26.2 29.1 Apr-95 30.8 Feb-94 24.1 27.6 Aug-95 30.5 28.Table E: Ex-tax Pump Price History .3 26.5 24.6 26.5 Jul-94 29.5 27.7 Winnipeg extax 27.6 30.7 29.6 26.5 27.3 28.4 30.9 29.1 31.7 24.5 Oct-95 30.2 32.9 27.9 26.4 27.3 21.5 Feb-92 28.3 28.2 26.5 26.6 27.0 26.4 27.3 30.2 Apr-93 28.7 26.6 25.5 26.6 27.9 26.4 31.3 28.7 31.0 24.0 28.4 28.0 24.4 31.1 19.1 27.8 29.3 27.6 26.5 Nov-95 30.6 Jun-92 32.7 25.9 24.6 28.1 26.0 26.6 26.9 24.0 31.8 25.1 24.9 30.8 24.4 26.4 25.2 24.4 25.2 25.6 28.4 23.4 29.8 24.5 Aug-94 28.9 25.9 Jul-93 28.9 28.2 27.0 Apr-92 30.

3 27.3 34.0 33.5 25.4 24.4 32.0 28.4 22.8 26.0 28.8 33.1 23.2 Saint John Halifax extax extax 34.9 29.9 30.4 31.8 27.7 26.3 24.5 31.6 27.8 28.2 27.3 25.3 31.1 24.3 29.2 25.2 22.3 28.2 30.6 26.3 34.2 32.8 24.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.1 30.2 21.3 31.6 29.3 31.0 34.9 28.5 33.6 33.9 28.4 32.9 24.0 32.5 24.3 29.3 34.5 31.8 30.1 34.8 27.1 24.9 33.7 27.4 26.8 30.6 22.0 32.2 27.7 26.0 36.7 28.5 25.6 26.9 31.7 24.3 28.1 34.5 30.4 31.9 30.6 23.9 26.8 25.0 26.4 28.0 31.8 28.4 25.9 32.6 32.5 28.3 29.5 24.2 36.0 34.3 23.5 29.8 32.3 25.0 33.6 26.8 28.3 28.0 29.6 36.2 26.4 26.6 31.0 28.0 25.6 31.2 32.1 25.6 32.1 32.3 28.3 30.4 27.3 31.0 29.2 27.9 29.7 32.5 30.2 28.8 Canada Avg extax 29.6 32.5 33.8 23.5 25.1 29.1 Montreal extax 31.8 25.8 30.2 26.9 27.8 25.1 31.4 25.4 24.7 24.5 27.2 24.1 30.0 23.9 27.8 29.3 28.8 36.2 33.0 30.3 25.9 27.5 26.0 28.5 27.7 28.8 32.8 25.7 23.6 Charlottetown extax 36.7 27.2 30.8 29.2 27.7 30.8 23.7 28.8 32.3 31.1 28.8 26.7 29.9 30.9 32.6 24.6 32.1 30.0 25.3 33.9 29.1 24.1 29.9 29.4 28.3 29.6 29.2 29.8 26.2 27.5 33.8 29.8 28.2 30.1 26.6 28.7 MJ ERVIN & ASSOCIATES 93 .0 26.9 32.2 26.7 25.7 23.7 26.1 22.9 33.8 27.6 28.5 28.6 25.8 28.4 31.0 34.0 33.9 32.4 21.0 30.9 35.8 26.5 27.5 25.2 28.2 27.2 28.9 30.9 23.2 25.1 29.1 26.5 26.2 33.4 33.4 36.9 37.7 27.5 32.1 24.9 26.0 23.7 26.6 27.4 36.7 24.2 25.7 22.8 27.7 26.6 34.2 34.8 23.6 25.2 27.7 Quebec extax 32.2 26.0 27.7 32.5 30.2 26.7 27.9 26.4 33.1 32.2 36.6 36.2 25.0 26.6 28.0 29.3 27.0 33.7 28.9 27.8 26.5 25.3 26.6 27.5 25.9 29.4 33.2 22.3 22.3 25.2 22.2 23.7 24.2 22.0 25.3 26.9 29.4 26.1 32.6 33.9 30.6 34.9 29.5 28.3 26.8 28.1 32.2 32.7 28.6 26.8 33.9 27.2 27.4 33.7 29.9 31.0 28.8 23.5 27.4 34.7 24.6 28.4 33.Table E: Ex-tax Pump Price History .7 23.2 27.7 34.0 36.8 29.4 32.3 29.1 34.5 28.0 33.7 34.7 30.4 25.4 25.6 23.3 35.7 32.7 26.1 28.6 32.8 32.8 29.7 33.5 34.6 28.5 36.2 24.

5 22.5 21.8 25.4 23.5 24.9 18.0 23.8 22.6 20.2 21.8 23.5 22.3 23.5 23.2 20.3 23.6 20.6 20.4 21.2 21.3 26.8 Ottawa rack Thunder Bay rack 20.4 21.6 20.3 21.9 24.3 20.8 20.7 22.5 17.2 20.2 19.7 21.3 21.7 20.9 19.9 18.2 22.3 21.6 19.4 22.4 22.0 19.7 22.2 18.2 21.9 20.8 19.7 21.9 21.8 20.3 22.9 25.8 18.9 22.2 22.1 Halifax rack 20.0 22.1 20.7 22.2 17.5 22.5 22.Table F: Rack Prices .6 19.7 MJ ERVIN & ASSOCIATES 94 .3 22.1 22.4 23.2 20.0 23.4 20.7 19.8 22.5 20.2 21.0 21.3 20.1 21.0 20.0 23.5 19.3 20.5 19.0 24.2 16.6 23.7 20.8 23.7 19.8 23.1 21.7 23.3 22.1 20.1 21.4 20.6 19.4 21.8 22.2 23.9 23.9 23.3 22.5 23.3 17.4 21.5 27.9 20.1 15.2 21.9 21.2 22.8 21.5 26.7 22.8 18.5 21.4 21.1 22.5 22.7 18.4 18.1 23.9 22.6 18.2 21.1 21.9 21.4 22.1 19.9 21.1 22.2 23.2 23.3 24.8 21.7 22.2 16.5 21.3 19.5 23.4 21.7 20.4 21.1 22.4 21.4 20.6 19.7 17.9 18.4 19.4 22.7 17.4 21.1 20.8 20.0 19.0 21.7 22.2 20.6 23.9 21.7 21.0 23.5 22.1 20.4 22.3 20.1 23.9 22.2 19.8 23.6 19.7 21.8 18.4 17.0 22.8 18.0 23.3 19.1 22.2 Quebec city Montreal rack Toronto rack rack 19.1 20.8 23.4 21.2 29.7 21.1 20.5 21.0 23.2 18.4 23.1 21.5 17.6 25.7 22.1 19.4 24.0 21.3 23.4 23.5 21.5 17.0 23.5 20.3 21.0 22.8 20.2 18.8 20.2 19.8 27.7 16.6 25.1 22.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.1 22.6 23.8 21.4 22.5 18.8 24.1 21.5 18.2 21.0 22.4 22.8 21.5 21.0 21.5 20.1 18.9 20.3 18.6 21.9 21.4 22.4 22.8 19.6 21.0 21.9 18.8 19.4 22.6 20.8 22.1 19.7 22.2 16.8 22.1 21.3 24.3 21.6 20.0 20.2 20.7 18.8 23.7 21.8 19.8 23.5 21.3 23.6 23.3 23.1 24.7 22.4 21.3 18.8 21.8 20.0 22.0 22.1 20.6 25.1 20.1 16.0 21.8 21.5 24.3 17.6 23.3 23.1 23.7 21.1 21.9 17.2 21.9 22.6 23.9 22.4 22.3 19.3 23.1 15.9 22.6 22.2 18.0 19.0 23.5 21.3 18.4 21.4 15.9 22.4 20.3 19.2 18.5 20.7 17.7 23.2 23.2 20.4 21.5 24.6 19.6 20.3 17.0 21.4 20.

9 20.9 18.4 21.6 20.0 21.8 18.1 20.2 24.3 23.5 21.5 Canada avg rack 22.7 22.6 24.4 21.5 18.7 24.0 20.7 20.6 23.1 23.0 24.0 22.0 21.7 21.6 23.2 22.7 21.9 23.4 21.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.3 23.3 22.9 20.2 24.6 23.7 25.4 24.4 24.4 23.5 23.6 23.7 19.8 20.1 23.6 25.5 21.5 22.2 23.9 17.7 22.2 19.8 Vancouver Victoria rack rack 24.8 21.7 17.4 23.2 22.8 20.5 20.2 23.4 22.0 18.2 22.0 22.7 23.2 22.0 18.3 23.4 19.5 21.9 19.0 22.1 22.5 23.5 21.9 21.6 23.1 24.1 23.7 21.1 20.3 20.0 21.2 21.9 21.0 22.8 20.9 21.1 16.9 22.1 17.5 21.1 21.7 23.9 23.8 21.6 22.5 19.4 23.1 18.1 19.6 21.8 21.3 20.3 21.5 23.7 22.7 23.6 22.4 21.6 21.4 22.5 24.9 23.3 17.9 22.5 21.2 23.1 22.1 16.8 23.7 21.6 19.7 21.5 22.5 24.4 22.4 20.0 17.5 22.7 24.7 22.6 23.5 22.1 23.2 24.5 21.0 22.3 24.9 19.5 23.1 21.9 21.9 19.3 22.0 17.4 18.1 21.4 21.2 22.3 23.9 24.9 23.4 24.7 22.0 21.8 25.4 25.5 23.4 20.0 24.2 19.2 23.1 22.8 22.1 19.2 20.2 23.7 23.9 21.5 19.6 20.5 20.9 22.7 21.2 20.3 20.7 22.2 22.6 21.7 21.6 22.5 18.3 24.4 22.7 21.0 23.4 19.1 23.9 19.7 22.6 25.7 22.2 21.3 23.5 22.9 21.9 23.3 23.6 21.8 24.3 21.1 23.6 20.0 23.5 23.0 23.1 21.3 19.6 23.2 18.1 23.9 22.6 22.1 25.1 23.3 17.6 21.4 23.Table F: Rack Prices .9 23.1 25.5 17.5 24.1 20.9 22.2 22.5 21.7 17.2 21.3 24.2 21.7 21.0 24.8 22.0 22.1 23.9 19.5 21.8 22.3 18.4 22.4 21.5 22.5 21.7 23.2 20.3 23.9 18.8 22.6 25.8 22.2 23.4 21.4 24.7 21.9 21.5 20.6 21.6 21.1 23.1 21.8 20.2 Edmonton Rack 23.3 19.1 22.2 22.5 19.0 25.9 22.3 20.5 20.7 24.9 22.5 23.3 24.6 24.6 23.1 25.5 19.1 21.6 17.3 21.8 23.3 22.9 19.9 24.0 22.9 19.8 19.1 22.2 20.5 24.3 22.9 21.9 21.6 19.8 21.0 22.7 21.6 21.7 21.8 24.4 21.8 22.7 18.0 20.2 24.0 20.1 22.1 21.9 22.2 21.7 22.0 23.6 20.6 17.8 23.3 17.6 21.0 24.0 21.6 21.9 20.1 18.0 23.9 24.5 MJ ERVIN & ASSOCIATES 95 .8 20.9 22.8 23.1 21.7 22.7 25.3 21.2 24.0 20.8 24.2 20.

78 67.412 722.45 53.55 58.87 61.20 61.03 58.60 60.621 102.529 123.246 2.702 333.334.628 702.101 447.70 55.97 63.145.10 63.543 2.48 56.922 103.10 53.30 54.89 60.093.749 243.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.298 576.204.17 Diesel 64.174.687 1.60 70.983 1.30 54.40 59.30 57.712 1.60 49.23 63.98 59.400 142.88 64.36 54.90 63.40 54.483 63.113 2.935 758.35 73.30 52.65 54.40 63.238 2.704.18 51.249.859 240.058 2.438 591.26 44.90 67.414 450.671 399.000 1.214 248.770 2.903 33.420.858.997 397.052 84.220 389.30 63.119 632.10 59.32 51.508 2.475 1.194.50 56.153 316.513 19.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661. MJ ERVIN & ASSOCIATES 96 .985 636.669 203.549 111.448.972 429.945.483 2.19 52.02 51.34 63.11 58.150 48.620.894 1.00 57.66 50.895 600.810.166 102.50 55.Table G: Study Market Data .196 669.20 58.72 63.74 57.241 451.25 57.796 2.625 64.643 184.20 59.557.686 273. Urban.296 179.90 62.141.19 49.850 126.173 568.377 30.897 350.60 50.745.018.13 58.192 2.554 2.332 101.00 66.83 68.00 57.26 49.234 799.009 54.056.07 61.250 748.749 91.000 217.834 71.101 256.597 2.300 578.018 2.94 55.53 48.16 59.830 2.702.72 58.70 49.268 478.40 61.88 54.20 60.000 63.370 41.10 52.060.933 25.102 98.030.00 67.40 58.73 65.014 3.678.000 1.23 53.980 120.80 64. and All Study Markets are weighted (by market population) averages.22 59.614 3.92 51.86 56.30 68.97 51.85 54.38 56.30 66.971 473.500 378.905 183.245 351.53 61.42 53.460 833.00 48.72 74.949 1.20 54.796 529.24 61.26 63.93 63.50 56.890 2.790 185.89 61.85 48.45 63.89 65.832 91.120 570.211 15.00 62.698 Note: Regional.837 329.516.636.811 120.28 65.

65 27.83 23.18 25.13 23.35 25.17 20.36 26.64 28.18 28.73 32.50 20.95 22.63 21.07 24.96 22.88 22.25 24.28 23.76 24.39 21.25 27.21 27.28 22.39 Note: Regional.08 23.07 24.27 20.89 29.11 26.81 28.07 24.48 25.90 26.Table H: Study Market Data .42 27.40 27.73 26.16 29.33 21.04 24.39 22.20 27.16 21.33 27.57 22.20 20.88 20.81 25.39 22.88 28.49 25.87 26.97 23.59 28.39 21.42 25.45 28.76 25.33 22.89 25.47 27.65 21.45 20.45 24.45 29.59 24.69 23.40 25.01 28.15 24.88 22.93 23.59 28.68 Diesel 36.33 21.34 25.43 20.15 20.49 21.43 20.83 22.89 26.90 27.33 21.02 23.58 25.34 20.08 25.45 20.89 28.82 21.83 24.69 27.92 30.51 31.88 20.63 25.91 21.01 22.33 22.03 24.42 24.45 20.98 28.25 31.33 21.47 28.95 22.78 Product taxes Midgrade Regular 26.84 28.54 28.56 22.47 20.99 28.15 27.96 24. MJ ERVIN & ASSOCIATES 97 .99 26.63 28.63 20.45 23.45 22.50 25.96 24.23 23.33 22.04 26.26 27.84 28.45 20.43 21.82 28.07 26.93 23.23 25.23 24.63 24.75 27.63 26.97 22.38 24.51 25.57 29.26 28.31 22.83 25.32 33.45 24.49 31.81 21.95 25.15 29.94 23.09 24.55 28. and All Study Markets are weighted (by market population) averages.07 26.36 24.59 22.38 24.49 21.97 25.23 26.34 26.41 27.03 21.30 29.16 22.06 28.75 22.25 28.81 27.27 29.92 20.45 25.51 20.43 28.45 29. Tax (by Grade) Rack Pt.33 21.95 Premium 26.41 22.51 25.59 28.74 21.32 21.03 20.92 21.83 24.53 23.21 27.55 28.37 27.83 24.92 22. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.65 26.88 28.93 27.85 28.42 24.09 27.59 22.43 21.Rack Price. Urban.98 25.

62 56.47 0.Blended Prices.23 7.96 25.82 3.03 7.10 3.30 5.11 26.77 37.81 26.90 59.64 2.27 11. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.73 1.93 22.76 5.02 3.51 11.80 9.78 2.00 58.82 32.20 14.70 22.34 0.20 5.24 7.94 22.75 23.58 1.94 17.89 28.25 1.08 55.06 0.52 30.21 24.033 0.50 3.13 11.17 11.94 Note: Regional.(∑x)2 ]/n2.14 60.83 36.82 95 Retail Gross Product Margin 6.86 28.98 0.96 27.96 28.28 1.96 3.26 5.98 0.63 58.85 26.22 14.00 0.75 28.18 7.53 6.43 0.24 23.34 1.02 13.95 6.22 5.14 7.47 58.17 1.77 5.27 6.24 7.12 6.68 7.21 8.27 60.22 1.95 21.19 5.36 20.60 23.56 24.60 7.27 62.23 38.41 7.91 22.44 33.38 7.64 3.05 6.72 26.77 30.04 22.98 1.83 21.31 0.41 29.17 26.26 3.35 60.29 8.93 56.89 21.21 8.12 23.13 0.88 31.53 21.28 56.45 6.52 5.06 5.86 49.29 7.44 56.83 1.31 34.36 0.28 1.31 28.99 0.73 10.90 23.99 2.63 60.85 21.04 28.56 4.98 31. Urban.60 14.41 12.91 29.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57. MJ ERVIN & ASSOCIATES 98 .42 2.64 3.38 28. Costs.83 12.68 2.07 0.45 1.81 28.03 28.Table J: Study Market Data .08 0.37 26.01 31.85 24.02 0. Variance uses the formula [n∑x2 .26 27.15 66.50 10. Average Deviation is the average deviation of the market values from their mean (average) value.53 22.88 5.68 7.11 31.50 58.10 6.33 .91 0. and All Study Markets are weighted (by market population) averages.49 57.64 1.35 58.91 2.84 28.85 11.44 25.48 7.79 0.54 50.58 66.06 28.57 12.01 0.35 27.07 30.00 4.38 2.97 0.73 2.33 9.66 28.02 22.17 9.35 28.92 22.31 23.38 22.28 27.38 0.39 56.50 0.00 22.08 3.32 31.04 23.29 24.43 23.49 2.16 20.79 33.16 54.08 17.16 3.89 0.30 12.73 22.84 5.07 0.80 1.83 27.04 0.18 21.59 4.71 33.13 28.18 55.

622 $ 174.542 $ 222.004.948 3.000 2.604.719 3.467 $ 96. MJ ERVIN & ASSOCIATES 99 . For 95 net retail petroleum revenue.716 Note: Regional.032 $ 77. and All Study Markets are weighted (by market population) averages. outlet costs.197.572) $ (286.780 $ 85.394. and consolidated outlet income these averages are based only on those markets with available data.279 $ 154.856 3.429 $ 238.746 $ (374.648 3. Revenue.332) $ (238.852) $ 119.023 $ (15.766) $ (274.658.564 $ 252.135 $ 199.890.095.000 $ 156.481 $ 96.526 $ 207.089.911) $ (166.520 5.011.Table K: Study Market Data .120 $ 54.900 $ 179.707 $ 260.934 3.478 4.272 $ 118.272 $ 210.677 $ 180.157.013 $ 227.295 $ 174.071.827.068 3.129 $ 97.640 4.144 2.367) $ (164.465.646) $ (98. but for ancillary revenue. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.550 694.014.623 2.066 3.626 $ 81.302 $ 69.074 $ 131.779 $ 121.805.688 $ 85.375) $ (49.557) $ 102.208) $ (226.694 3.542.010 1.966 3.247 4.289 981.217 2.265. Outlet Costs. these averages are based on all applicable study markets.098 $ (320.224 $ 189.241) $ (227. Urban.837 $ 56.102 $ 223.223.772.244 95 net retail Ancillary Revenue petroleum revenue $ 208.246 $ 118.209 $ 26.638 2.875 $ 255.871) $ (128.263 $ 60.750 $ 271.067 $ 92.993 $ 113.250.510 $ 60.913 $ 139.098.995 $ 234.544 $ 175.630 3.081 $ 222.632 $ 256.058.885.117 $ 207.855 $ 278.502 $ (80) $ 60.000) $ (241.866) $ (244.550 $ 177.900 2.956) $ 200.143) $ (249.794 3.209 $ 82.800 $ 225.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.Sales.

145 81.38 0.48 7 7. N refers to study sample size (total = 481).Demographic Profiles Population pop’n 299 .80 10 4.73 5 10.88 12 7.058 1.60 11 7.51 9 11.275.870 120.53 10 6.45 14.30 1.04 15 4.827 3.13 2 11.715 14.89 2 4.47 7.23 6 7.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.98 7.250 981 2.45 0.60 3.098 4.000 pop’n No.775.00 11.84 12 5.08 4 2.01 7 2.180 616.36 5. MJ ERVIN & ASSOCIATES 100 .76 18 5.845 15.20 0.975 2.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.22 3.89 7.315 710.54 6 2.400 74.06 5.79 6.542.06 16 4.08 16 3.41 0.394 2.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.604 3.223 3.745 16.28 17.50 9. inverse ranking is used (lowest value = 1).310 1.43 12.21 0.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.95 3 9.970 330.27 1.50 8. rank* 3.68 4 7.90 13 4.675 179.98 6.96 5.790 1.Table L: Study Market Data .605 16.52 13 5.29 1.071 2.465 694 3.40 1 3.42 5 14.30 0.265 2.014 5.089 3.17 19 9.88 11 8.91 17 4.91 12.55 19 11.004 3.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.41 1. of Brands No.23 8 31.658 3. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.27 0. of Outlets No.20 17 14.29 8 7.33 0.02 0.775 678.550 1.157 2.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.85 15 11.73 14.10 3.475 3.50 3 10.08 3.585 6.97 8.06 1 5.40 9 4.24 0.47 14 3.22 0.095 3.

and provide background resources to industry public affairs managers and the media. The SCF is the basis for this study. Ottawa ON. aviation and lubricants marketing channels. safety and business issues. Contact: Brendan Hawley. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). and in doing so. bulk. health. They work with major oil companies in benchmarking performance in the retail. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. accessible through a public fax-back dial-in system. Contact: Michael J. Ervin.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Petroleum Products Address: 235 Queen Street. Contact: Cindy Christopher. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. 119 . generate jobs and growth. Ottawa ON.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Senior Advisor.14th Street NW Calgary AB. cardlock. Ottawa ON. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. They maintain a large database of historical prices at most major centres. Contact: Maureen Monaghan Address: 580 Booth Street. Principal Address: #400. a series of studies whose goal is to strengthen Canada’s competitiveness. Vice President Public Affairs Address: 275 Slater Street.

6th Avenue. Contact: Robert Curran. Calgary AB.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures.6th Ave. Contact: Gerard O’Connor. 311 . Managing Editor Address: Suite 2450.Octane Magazine Octane is Canada’s refining and marketing trade journal. Ottawa ON. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Energy Section Address: Statistics Canada. 101 . ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Contact: Len Bradley. Executive Director Address: 214. Octane is published quarterly. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. and is a useful “window” on this industry. Its monthly publication “Refined Petroleum Products” (cat. SW Calgary. no 45-004) is a useful source of supply and demand volume data.ab. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Supervisor.

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